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Navigating the Complexities of Reg BI: What Financial Advisers Need to Know

By Lisa Gok, chief legal officer, Cetera Financial Group

The regulatory environment for broker-dealers and investment advisers is getting more difficult by the day. Over the course of 2023, we saw the number of Financial Industry Regulatory Authority actions triple, with a 63% increase in fines. Not only did the total number of fines increase, but the number of cases with very large fines also increased. According to the annual Eversheds Sutherland analysis of FINRA disciplinary actions, fines of $1 million or more were up in 2023, and fines of $5 million and more increased as well.

I have been immersed in the compliance world for three decades, including 11 years as an assistant regional director with the U.S. Securities and Exchange Commission. It is clear to me that firms of all sizes are now facing greater scrutiny and tougher enforcement actions than ever before. This is especially true regarding compliance with Regulation Best Interest. Reg BI, as it is known, was among the top five enforcement issues as measured by total fines in 2023, signaling that firms need to significantly increase supervision to comply with these requirements.

Let’s take a closer look at what the regulation requires and how it is impacting advisers.

What Is Reg BI?

Reg BI is an SEC rule designed to help safeguard investors and standardize the conduct standards for broker-dealers and financial advisers. Previously, brokers were only held to the suitability standard — meaning that when brokers advised their clients, they only had to recommend investments that were suitable but not necessarily in their clients’ best interest.

Now, however, broker-dealers and associated persons must adhere to a “best interest” standard of conduct for when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. The adviser conduct standards in Reg BI and PTE 2020-02 are very similar, so advisers can generally use the same policies and procedures to comply with Reg BI and the U.S. Department of Labor’s newly finalized Retirement Security Rule, although the DOL has additional requirements.

Reg BI’s 4 Pillars

There are four key components to Reg BI, which are:

  • Disclosure: Broker-dealers must provide new disclosures (similar to Form ADV), including information about services, fees, compensation, and conflicts.
  • Care: Broker-dealers must exercise reasonable care, diligence, and skill when making recommendations to retail customers. This includes understanding the potential risks, rewards and costs of a recommendation, and having a reasonable basis to believe it could be in the customer’s best interest.
  • Conflict of interest: Broker-dealers and advisers must establish, maintain, and enforce written policies and procedures to identify, disclose, eliminate, and mitigate conflicts of interest with their clients.
  • Compliance: Broker-dealers must establish, maintain, and enforce written policies and procedures to comply with all of Reg BI’s obligations.

Five Steps Advisers Can Take to Meet Reg BI Challenges

Here’s where the rubber meets the road because the challenges of Reg BI are real for advisers, especially for those in smaller firms. They face added costs and a huge amount of new compliance work. There are steps, however, that advisers can take to better understand and prepare for the regulatory developments they face. And the good news is that much of the information they need is readily available.

Here are five steps advisers can – and should – take, starting today.

  1. Keep up with SEC speeches. Although the SEC is known for being opaque, its website includes a section of speeches and statements made by SEC commissioners. These commissioners use their speeches to telegraph where they are going, so check regularly to see what they are saying.
  2. Make sure to check FINRA’s annual report. FINRA releases an Annual Regulatory Oversight Report at the start of every year. It provides a glimpse into its planned regulatory oversight for the coming 12 months. Make sure that your firm is meeting FINRA’s priority areas of focus.
  3. Follow the news. Keep up with the headlines and stories in industry news sources and follow trusted experts. Good reporters will generally capture the developments you need to know.
  4. Connect with your industry peers. Whether it’s through membership in professional groups or attending conferences, webinars and other events, other advisers in your space can be sources of invaluable insight, information, and helpful tips.

Reg BI is indicative of the sharper scrutiny financial professionals can expect to face going forward, as regulatory policies become increasingly stringent. It is essential that advisers safeguard their firm’s compliance with changing regulations and laws. Doing so will ensure they can grow their business and continue to serve as trusted advisers to their clients.

Lisa Gok is the chief legal officer at Cetera Financial Group, where she serves as executive legal adviser to Cetera and its board of directors. In this role, Gok is responsible for ensuring a holistic legal view for Cetera, ensuring best practices while operating as a strong strategic partner for Cetera on a broad range of legal, operational, and corporate activities. Prior to joining Cetera in 2012, Lisa held a variety of leadership positions both in and outside of financial services, including 15 years with the U.S. Securities and Exchange Commission.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.

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