Regulation Best Interest (or “Reg BI”, as it is often referred to) is officially here, and along with it comes a new regime of fiduciary level compliance requirements that will apply to certain broker-dealers and investment advisors.
While many advisors who provide retirement-related advice may be inclined to gloss over the new rule, the DOL has indicated that its forthcoming revamped fiduciary rule will follow along the same lines as the SEC rule—meaning that nearly all advisors will soon need to become familiar with a fairly uniform set of principles. Importantly, Regulation Best Interest unexpectedly will apply to some retirement plan rollover transactions, so that understanding these new rules will be critical to advisors who provide clients with certain rollover-related advice.
What Is Regulation Best Interest?
Under Regulation Best Interest, certain broker-dealers and other investment advisors are now required to eliminate conflicts of interests, or are required to disclose those conflicts on a new Form CRS and take steps to mitigate the impact of those conflicts. Form CRS is a short—no more than four-page—summary detailing the relationship between the advisor and client, the applicable standard of conduct under Reg-BI and the fees and compensation structure generally associated with the relationship. Form CRS must also contain a section detailing the firm’s disciplinary history and direct the client where to look for additional relevant information.
In many cases, broker-dealers and investment firms will have to reevaluate their compensation structures in order to eliminate certain contests, quotas and other rewards that encourage advisors to promote a certain security or class of securities without real consideration of whether the particular transaction is in the client’s best interest.
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To comply with the rule, broker-dealers must conduct a reasonable analysis to first understand the potential risks and rewards associated with any given transaction or recommendation involving securities. In order to make a recommendation to the client, that analysis must conclude that the particular transaction or series of transactions is in the client’s best interests. Further, in considering all costs and benefits of a transaction, the broker-dealer must have a reasonable basis to believe that the transaction does not put the advisor’s own best interests ahead of the client’s interests.
Regulation Best Interest also—and surprisingly–clearly states that this best interest standard will now apply to advisors who provide recommendations with respect to rollovers from employer-sponsored retirement plans into IRAs.