Reg BI and Form CRS

Regulatory Obligations

The SEC’s Regulation Best Interest (Reg BI) establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make recommendations to retail customers of any securities transaction or investment strategy involving securities, including account recommendations. Pursuant to this standard, a broker-dealer and its associated persons must not put their financial or other interests ahead of the interests of a retail customer when making a recommendation. The standard of conduct established by Reg BI cannot be satisfied through disclosure alone.

Separately, whether they make recommendations or not, firms that offer services to retail investors must file and provide retail investors with Form CRS, a brief relationship summary in a prescribed format that discloses important information about the firm in plain language (e.g., investment services provided, fees, conflicts of interest, legal and disciplinary history of the firms and associated persons). 

Findings 

Reg BI

  • Failure to Comply With Care Obligation:
    • Failing to conduct a reasonable investigation of offerings prior to recommending them to retail customers (e.g., unable to reasonably evidence due diligence efforts regarding the issuer; relying solely on the firm’s past experience with and knowledge of an issuer based on previously completed offerings; or relying solely on information from the issuer or its affiliate).1
    • Making recommendations of securities or investment strategies involving securities (including account recommendations) without a reasonable basis to believe that they were in the best interest of a particular retail customer, including recommendations of complex or risky products that do not align with the retail customer’s investment profile.
    • Recommending a series of transactions that were excessive in light of retail customers’ investment profiles and factors such as high cost-to-equity ratios and high turnover ratios.
    • Recommending that customers replace or switch existing products or accounts (e.g., variable annuities, mutual funds, 529 plan accounts) without understanding or considering associated risks and costs, including as applicable, the imposition of penalties (e.g., surrender charges) and new surrender periods, loss of existing benefits, tax consequences and transaction costs.
    • Failing to consider or compare relevant costs and fees, such as product or account-level fees, when recommending a product or when determining whether to recommend that a customer purchase a security in either the customer’s brokerage or advisory account, or to recommend transfers of securities between a customer’s brokerage and advisory accounts.
    • Not maintaining profile information collected from retail customers in accordance with SEA Rule 17a-3(a)(35), thereby undermining the firm’s and its associated persons’ abilities to demonstrate compliance with the Care Obligation.
    • Making recommendations of complex or risky products that result in concentrations exceeding limits specified in a firm’s policies, or comprising a sizable portion of a retail customer’s liquid net worth or securities holdings in a manner that is inconsistent with the retail customer’s risk tolerance or investment objectives.
  • Failure to Comply With Conflict of Interest Obligation:
    • Not identifying and disclosing, mitigating or eliminating, as appropriate, conflicts of interest associated with recommendations of securities transactions or investment strategies involving securities.
    • Not identifying and mitigating (i.e., modifying practices to reduce) conflicts of interest that create an incentive for an associated person to make securities recommendations that place the interests of the associated person or the firm ahead of the interests of the retail customer.
    • Not identifying and disclosing all material facts concerning material conflicts of interest related to an associated person’s incentive to recommend particular securities or account types (e.g., an associated person’s financial incentive to recommend the opening of new investment accounts at the firm’s affiliate).
    • Not identifying and addressing all potential conflicts of interest relevant to a firm’s business model, including, but not limited to, material limitations on securities or investment strategies and conflicts associated with these limitations.
  • Failure to Comply With Disclosure Obligation:
    • Not providing retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with these retail customers or related to conflicts of interest that are associated with the recommendation, including:
      • material fees received as a result of recommendations made (e.g., revenue sharing, or other payments received from product providers or issuers, as well as other fees tied to recommendations to roll over qualified accounts);
      • material limitations in securities offerings; and
      • transaction-based fees that were inconsistent with—and, in some cases, materially higher than—those outlined in Reg BI customer disclosures.
    • Associated persons, firms or both, improperly using the terms “advisor” or “adviser” in their titles or firm names, even though they lack the appropriate registration and do not engage in other activities that allow the use of those terms (e.g., a firm that was formerly registered as both a broker-dealer and an investment adviser retaining the term “advisor” or “adviser” in its firm name after withdrawing its registration as an investment adviser).
  • Failure to Comply with Compliance Obligation:
    • Failing to adopt and implement written policies and procedures that are reasonably designed to achieve compliance with Reg BI by, for example, stating the rule requirements but failing to identify how the firm will comply with those requirements (e.g., requiring associated persons to consider costs and reasonably available alternatives when making recommendations, but not specifically addressing or detailing how associated persons should do so).
    • Failing to enforce Reg BI procedures or supervisory processes for compliance, such as outlining documentation requirements, and failing to implement any process to confirm associated persons are complying with the firms’ requirements or failing to follow up on red flags (e.g., duplicative rationales documented by the same associated person for different types of customers).
    • Failing to establish written policies and procedures that address how training on the requirements of Reg BI would be conducted and enforced, leading to failures to conduct adequate or ongoing training of associated persons.
    • Failing to have policies and procedures reasonably designed to achieve compliance with Reg BI regarding recommendations involving variable annuities (VAs) or registered index-linked annuities (RILAs) (e.g., not adequately collecting and retaining key information on variable annuity or RILA transactions; and not sufficiently training associated persons and supervisors to determine whether variable annuity or RILA exchanges complied with the standards of Reg BI).2
    • Failing to have written policies and procedures reasonably designed or enforced with respect to account recommendations, for example, by:
      • not being reasonably designed to address recommended transfers of products between brokerage and other private wealth management accounts or rollover recommendations;
      • not being reasonably designed to achieve compliance with the capacity disclosure requirement, including the titling restriction;  
      • not following up on red flags such as identified patterns of account switches by the same associated person;
      • requiring documentation of rationale, but not following up on generic or insufficient rationales;
      • not providing any procedures or guidance regarding the factors to consider when recommending a particular account type, such as the costs associated with such accounts and the services provided (including whether the customer was already receiving such services); or
      • failing to detail any steps a supervisor should take to determine whether an account type recommendation was in the customer’s best interest.

Form CRS

  • Deficient Form CRS Filings: Firms’ Form CRS filings significantly departing from the Form CRS instructions or SEC guidance by:
    • inaccurately or inappropriately representing the firm’s or its associated persons’ disciplinary histories, such as by including qualifying language to explain disciplinary history (e.g., “Yes. However, our firm has been in business for many decades and never received any customer complaints.”);
    • omitting or misstating material facts (e.g., description of services offered, limitations of the firm’s investment services, cost disclosures);
    • failing to describe, or inaccurately describing types of compensation and conflicts of interests such compensation creates;
    • incorrectly stating that the firm does not provide recommendations; and
    • changing or excluding language required by Form CRS.
  • Failing to Properly Deliver Form CRS: Failing to deliver or not creating a record of the date on which the firm provided each Form CRS to each retail investor, including failure to deliver Form CRS before or at the time such retail investor opened an account.
    • If the relationship summary is delivered electronically, failing to present it prominently in the electronic medium and make it easily accessible for retail investors (e.g., by solely placing a link to the Form CRS in an email footer below the signature line; by including the Form CRS among other disclosures in a ZIP file attachment without any mention of the Form CRS in the email).
  • Failing to Properly Post Form CRS: For firms that have a public website, failing to post or failing to post prominently, in a location and format that is easily accessible to retail investors, the current Form CRS (e.g., requiring multiple click-throughs or using confusing descriptions to navigate to the Form CRS).
  • Failing to Adequately Amend Form CRS: Firms not in compliance with Form CRS in relation to material changes because they:
    • failed to timely file the amended Form CRS with an exhibit highlighting the changes in the Central Registration Depository (CRD) (i.e., within 30 days of the date when Form CRS became materially inaccurate); or
    • failed to communicate or timely communicate changes to existing retail investors (e.g., delivering amended Form CRS, with required exhibits, showing revised text or summarizing material changes or communicating the information through another disclosure, in either case within 60 days after the updates are required to be made (90 days total from the date when Form CRS became materially inaccurate).

Effective Practices 

Care Obligation

  • Costs and Reasonably Available Alternatives: Including in written policies and procedures specific factors related to evaluating costs and reasonably available alternatives to recommended products, including but not limited to:
    • providing clear guidance to associated persons making recommendations on how to evaluate costs and reasonably available alternatives, such as by:
      • advising that reasonably available alternatives be considered before a recommendation has been formulated;
      • using worksheets, in paper or electronic form, to compare costs and reasonably available alternatives;
      • creating notes or documents in a similar format to evaluate recommended transactions and provide information on the retail customer’s financial situation, needs and goals (and substantiate why that specific recommendation was in the retail customer’s best interest);
      • specifying the relevant factors to consider when evaluating costs (e.g., deferred sales charges) and reasonably available alternatives (e.g., similar investment types or less-complex or less-risky products available at the firm);
      • updating client relationship management (CRM) tools to automatically compare recommended products to reasonably available alternatives; or
      • ensuring that any technology used to generate recommendations is coded to consider costs on both affiliated and non-affiliated investment products offered by the firm;
    • setting forth clear written policies and procedures that address supervisory reviews and firm-required documentation;
    • sampling recommended transactions to evaluate how costs and reasonably available alternatives were considered; and
    • establishing limitations on complex or higher-risk products, such as by using firm concentration limits or minimum liquid net worth requirements.
  • Heightened Scrutiny of Complex or Risky Investments for Retail Customers: Mitigating the risk of making recommendations that might not be in a retail customer’s best interest by:
    • establishing product review processes to identify and categorize risk and complexity levels for existing and new products;
    • applying heightened supervision to recommendations of products, or investment strategies involving securities, that are complex or risky, or limiting such recommendations to specific customer types; and
    • appropriately training associated persons on the features of complex and risky products recommended to retail customers.

Conflict of Interest Obligation

  • Policies and Procedures: Establishing and implementing policies and procedures to address conflicts of interest by:
    • using conflicts committees or other mechanisms, or creating conflicts matrices tailored to the specifics of the firm’s business that address, for example, conflicts across business lines and how to eliminate, mitigate or disclose those conflicts;
    • revising commission schedules for recommendations within product types to flatten the percentage payout rate to employees; and
    • broadly prohibiting all sales contests, regardless of whether they are required to be eliminated under Reg BI.

Disclosure Obligation

  • Implementing Systems Enhancements for Recording the Date of Delivery of Required Customer Documents: Maintaining a record for delivering Form CRS and Reg BI-related documents to retail customers in a timely manner by:
    • automating mechanisms to evidence delivery of Form CRS and other relevant disclosures; and
    • memorializing delivery of required disclosures at the earliest triggering event.
  • Providing Clear Disclosure on Account Type Recommendations: Providing retail customers with clear, accessible materials that allow them to compare the features, benefits and costs of certain account type recommendations (e.g., rollovers).

Compliance Obligation

  • Implementing New Surveillance Processes: Supervising associated persons’ compliance with Reg BI by:
    • conducting reviews to confirm that their recommendations meet Care Obligation requirements, including system-driven alerts or trend criteria to identify:
      • account type or rollover or transfer recommendations that may be inconsistent with a retail customer’s best interest;
      • products that are high risk, high cost, complex or represent a significant conflict of interest;
      • excessive trading; and
      • sale of same product(s) to a high number of retail customers; and
    • supervising communication channels (e.g., email, social media) to confirm that associated persons who were not investment adviser representatives (IARs) were not using the word “adviser” or “advisor” in their titles.
  • Incorporating Reg BI-specific reviews into the branch exam program, in addition to other ongoing monitoring and surveillance.
  • Focusing on areas such as documenting Reg BI compliance and following the firms’ Reg BI written policies and procedures (as part of overall Reg BI compliance efforts).

Additional Resources

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1 For additional context, see FINRA Regulatory Notice 23-08 (FINRA Reminds Members of Their Obligations When Selling Private Placements) noting particular concern where the firm or its associated persons are affiliated with the issuer or when red flags are present. See also the Report’s Private Placements topic for additional findings related to firms and their associated persons recommending private offerings without having a reasonable basis.

2 See the Report’s Annuities Securities Products topic for additional findings related to firms not reasonably supervising variable annuities or RILA recommendations for compliance with Reg BI.