After five years on the books, broker-dealers are still grappling with how to comply with the Securities and Exchange Commission's Regulation Best Interest.
Four key areas of the rule continue to be trouble spots: account recommendations, understanding account recommendation costs and reasonable alternatives, when to document and conflicts, Jim Wrona, associate general counsel for the Financial Industry Regulatory Authority, said May 14 at the broker-dealer self-regulator's annual meeting in Washington.
"Many firms and reps continue to have questions about what the concept of reasonably available alternatives really means and how to document the issue," agreed Brian Rubin, partner and co-head of securities enforcement practice at Eversheds Sutherland. "Given the likely reduced enforcement activity by the SEC and that states are passing their own fiduciary rules, firms are grappling with how to comply with a multi-headed compliance regime."
Reg BI is included in both the SEC’s 2025 Exam Priorities and FINRA’s 2025 Risk Oversight Report.
This year’s iteration of FINRA's "report adds further specificity, particularly around the importance of due diligence as a component of Reg BI compliance," Valerie Mirko, leader of Armstrong Teasdale’s Securities Regulation and Litigation practice area, told me in a previous interview. "For example, the report specifically notes to avoid relying solely on information from the issuer or an affiliate — while I am unsurprised to see that, I think this is helpful to firms, particularly smaller broker-dealers."
Other new specific items regarding Reg BI "are the reminders regarding investment profile and concentration limits. Questions regarding both of these come up regularly in the exam and enforcement context (SEC and FINRA)," Mirko said.
A 'Big Lift'
Reg BI "was a monumental change" in the SEC's rules from a sales practice perspective, Michael Rufino, national associate director of the SEC's National Broker-Dealer/Exchange Program, said Monday at the SEC Speaks conference, held by the Practising Law Institute.
Looking back five years, Rufino noted the early phase of Reg BI compliance included mistakes involving noncompliance with policies and procedures, as well as firms "switching out the term suitability for best interest, which is not really what the intent [of the rule] was," and conflicts not being mitigated.
The SEC's focus now, Rufino said, has moved to Reg BI's care obligation, "making sure that recommendations are being made in the best interest of investors — that's what we're focusing in on — products, business lines that may fall" under Reg BI. "To the industry's credit, we have seen marked improvements over five years. We've really seen firms embracing" Reg BI.
Former SEC Commissioner Dan Gallagher, now chief legal officer of Robinhood, added on the panel with Rufino that Reg BI has been "a complete success" for the SEC.
Reg BI "is much less 'squishy' than the fiduciary duty," Gallagher continued. "... I'm used to having big rule sets, and it works. It might not be great—it's onerous; if you want to make a recommendation, you'd better have it right."
Reg BI “was a big lift for us," Greg McShea, general counsel for Janney Montgomery Scott, said on May 15 at FINRA's annual meeting. Janney "had to adopt or modify 36 different policies," McShea said.
Reg BI has "also been a game changer," McShea continued, as it has “dramatically de-risked the business in a good way. As painful as it was to get into compliance with Reg BI, I think it was good for the business, good for our clients, good for everybody."
As to de-risking, Mirko noted Monday in an email that "securities that may have in the past been the reason for arbitration complaints now are simply no longer on the product shelf" due to Reg BI.
Documenting
As to what Reg BI says about documenting, Wrona explained there are certain aspects of Reg BI that require it.
"The clearest example is the investment profile information," Wrona said. "So, if the customer is providing you information about their investment profile, that is something that has to be documented."
However, Reg BI "does not require documentation for every single individual recommendation. So, what the SEC said in the adopting release is that you have to be able to demonstrate compliance with Reg BI, but you can take a risk-based approach to whether or not you're going to document your rationale for a particular recommendation."
Wrona added: "You have to be able to demonstrate, but you can take a risk-based approach for determining what needs to be documented."
Tech Tools
Regulators continue to focus on Reg BI's core components, "i.e. investment profiles (and keeping those reasonably refreshed) and due diligence as part of Reg BI's care obligation and the importance of updating conflicts inventories," Mirko said.
Broker-dealers are focused on Reg BI's core components, "and how to optimize existing processes and technologies for compliance," Mirko said, adding that "firms that are leveraging technology less may not be able to track certain items at the same level of granularity [as] more technology-forward firms."
Added Mirko: "There are a number of Reg BI-related technology solutions, including tracking reasonably available alternatives (to assist with care obligation compliance), cataloging conflicts (to assist with complying with the conflict and disclosure obligations), or managing the flow of information to individual financial advisors as part of meeting and documenting Reg BI compliance generally."
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