Regulation Best Interest (Reg BI): What Financial Advisors and Broker-Dealers Need to Know

As the financial services industry evolves, Regulation Best Interest (Reg BI) is at the forefront. If you're a financial advisor or broker-dealer, understanding and complying with Reg BI isn't just a regulatory requirement—it's crucial for protecting your clients and your business.

In this post, we’ll break down what Reg BI means for you, offer practical steps to ensure compliance, and introduce how technology, like Investipal’s generative AI, can simplify the process.

What is Regulation Best Interest?

Regulation Best Interest (Reg BI) was introduced by the SEC to raise the standard of conduct for broker-dealers when recommending securities to retail clients. Unlike the previous suitability rule, Reg BI requires brokers to act in their clients' best interests, minimizing conflicts of interest and ensuring that all recommendations are appropriate for the client's circumstances.

In simple terms: no more pushing products just because they pay a higher commission. Now, it's about what's genuinely best for the client.

But how do you meet this standard in practice? Reg BI outlines four core obligations: disclosure, care, conflict of interest, and compliance.

Breaking Down Reg BI’s Four Core Obligations

1. Disclosure Obligation: Before making any recommendations, broker-dealers must provide full disclosure of key facts, including the scope of the relationship, fees, and any conflicts of interest. This is often fulfilled through Form CRS (Customer Relationship Summary), which gives retail clients clear and concise information about their relationship with financial professionals.‍
2. Care Obligation: This goes beyond the previous suitability standard. Now, brokers must exercise reasonable diligence and care in evaluating whether a recommendation is in the best interest of the client. This means fully understanding the client's financial situation, goals, and risk tolerance before making any recommendations.‍
3. Conflict of Interest Obligation: Firms are required to establish and enforce policies that identify, disclose, and mitigate conflicts of interest. Whether it’s related to compensation, proprietary products, or other financial incentives, conflicts of interest should be managed to ensure that they don’t interfere with acting in the client’s best interest.‍
4. Compliance Obligation: Firms must establish and maintain robust compliance programs to ensure adherence to Reg BI. This includes creating policies and procedures that ensure ongoing compliance, as well as monitoring and enforcing these standards consistently.

Reg BI vs. Fiduciary Standards: What’s the Difference?

One of the biggest questions that arises when discussing Reg BI is how it differs from the fiduciary standard applied to investment advisors. While both require acting in the client's best interest, the fiduciary standard tends to be more stringent, with broader obligations regarding loyalty and care.

However, Reg BI closes several gaps that previously allowed broker-dealers to operate under more lenient rules. The old suitability standard allowed brokers to recommend investments that were merely suitable, not necessarily in the client’s best interest. Now, brokers must prioritize the client’s best interest and address conflicts of interest, such as those related to compensation. Additionally, Reg BI mandates that firms implement strong compliance programs, further aligning broker-dealer responsibilities with those of fiduciaries.

For advisors who work in both capacities, it’s important to be clear on which standard you’re operating under at any given time.

The Role of Form CRS in Reg BI Compliance

Form CRS (Customer Relationship Summary) is a key disclosure document required under Reg BI. Both broker-dealers and investment advisers must provide this concise, plain-language form to retail investors. The purpose of Form CRS is to outline the nature of the relationship, services offered, fees, conflicts of interest, and any disciplinary history.

Form CRS must be delivered before or at the time of certain key events, including:

• When a new brokerage account or investment advisory agreement is opened.
• When a recommendation is made regarding an account type, securities transaction, or investment strategy.

Incorporating Form CRS into your compliance strategy ensures that you're fulfilling Reg BI's disclosure obligations and maintaining transparency with your clients, helping them make informed decisions about their financial relationships.

Practical Steps for Compliance

Now that we've covered the basics, let’s talk about how to comply with Reg BI on a practical level.

• Review and Update Client Documentation: Ensure that all client-facing documents, including Form CRS, clearly outline any conflicts of interest, fees, and the nature of the relationship. Regularly update these documents to reflect changes in your business practices.
• Stay Informed: The regulatory landscape is always changing, so staying informed about new guidance from the SEC or FINRA is crucial. Regular training for your team can help keep compliance top of mind.
• Implement Strong Internal Policies: Your firm’s internal policies should reflect the requirements of Reg BI, including regular audits and reviews to ensure that everything is functioning as intended. Encourage a culture of compliance across all levels of your organization.

Automating Reg BI Compliance with Investipal's Generative AI

With all these requirements, staying compliant can feel overwhelming. But it doesn't have to be. This is where technology steps in.

Investipal's generative AI tools can help automate much of the heavy lifting. Whether it's generating Reg BI disclosure documents like Form CRS or assisting with compliance monitoring, Investipal’s AI can streamline these tasks, freeing up your time to focus on your clients.

By automating document generation, you reduce the risk of human error, ensuring that every client interaction is compliant with the latest regulations. Plus, the AI adapts to changes in the regulatory environment, so you’re always up to date.

Impact on Client Relationships

One of the most significant shifts with Reg BI is how it changes the advisor-client relationship. Clients now expect greater transparency and trust from their advisors. To build this trust, it's essential to maintain open communication, clearly explain the reasoning behind your recommendations, and be upfront about any potential conflicts of interest.

Ultimately, Reg BI is designed to strengthen your relationship with clients by ensuring that their best interests are always the priority.

Consequences of Non-Compliance

Securities regulators, including the SEC and FINRA, have significantly ramped up enforcement of Reg BI, imposing large fines and penalties for violations. In recent years, enforcement actions have tripled, particularly against individuals for excessive trading and failure to supervise. Notably, fines have escalated, with some firms and brokers facing substantial financial penalties and suspensions. Regulators are prioritizing compliance with Reg BI's four obligations, making it clear that non-compliance can have serious consequences for both firms and individuals.

Ensuring compliance is crucial for protecting your business and maintaining your reputation in the industry.

The Future of Reg BI

As the financial landscape continues to evolve, Reg BI will remain a key regulatory standard for broker-dealers. Staying compliant isn’t just about avoiding penalties—it’s about building a stronger, more trustworthy relationship with your clients.

With the help of technology like Investipal's generative AI, compliance doesn’t have to be a burden. Automating routine tasks allows you to focus on what really matters: helping your clients achieve their financial goals.

Ready to streamline your compliance efforts? Explore Investipal’s AI-powered solutions today and see how they can make Reg BI compliance easier and more efficient for your firm.