News & Insights

4 min read

Industry Alert: SEC Will Not Postpone Reg BI Compliance Date

May 11, 2020 9:42:03 AM

COVID-19 has changed so much in so little time, but the Reg BI compliance date of June 30, 2020 remains the same.

Last year, the SEC voted to adopt Regulation Best Interest (more commonly known as Reg BI) and the Client Relationship Summary (CRS) form, and they announced that the implementation deadline for these new regulations would be the end of June 2020. The industry was equally curious and torn as to whether the SEC would (or should) postpone that previously announced implementation date out of consideration to the global impact of the coronavirus pandemic. According to an article shared by Crain’s Cleveland Business, ”the SEC's Office of Compliance Inspections and Examinations (OCIE) and the Financial Industry Regulatory Authority (FINRA) have alerted broker-dealers that they will move forward with their previously announced plans to begin compliance examinations immediately after the effective date”.

So, what does that mean for you?

Reg BI and Suitability

First, let’s revisit what Reg BI entails – from the new obligations to the definition of suitability.

Reg Bi is a formalized standard of conduct for broker-dealers. Generally speaking, it requires those broker-dealers to put the best interests of their clients first. For a lot of folks in the industry, this is a code of ethics by which they lived and worked already. But even though that may have been the case, the SEC wanted to enact regulations to ensure that consumers would be protected in all instances.

As we shift into a more digital-first landscape, consumer protection is paramount. In order to more strictly guarantee that consumer’s needs are prioritized over any individual broker-dealer or firm’s needs and interests, the SEC introduced four unique obligations. These obligate broker-dealers to keep extensive documentation around any product recommendations and sales transactions. In more detail:

  1. Disclosure Obligation: Broker-dealers must disclose material facts about the relationship and recommendations, including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether the broker-dealer provides monitoring services.
  2. Care Obligation: A broker-dealer must exercise reasonable diligence, care and skill when making a recommendation to a retail customer. The broker-dealer must understand potential risks, rewards, and costs associated with the recommendation.  The broker-dealer must then consider these factors in light of the retail customer’s investment profile and make a recommendation is in the retail customer’s best interest.  The final regulation, which is an enhancement from the proposal, explicitly requires the broker-dealer to consider the costs of the recommendation.
  3. Conflict of Interest Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest. This obligation, which is an enhancement from the proposal, specifically requires policies and procedures to:

    -Mitigate conflicts that create an incentive for the firm’s financial professionals to place their interest or the interests of the firm ahead of the retail customer’s interest;

    -Prevent material limitations on offerings, such as a limited product menu or offering only proprietary products, from causing the firm or its financial professional to place his or her interest or the interests of the firm ahead of the retail customer’s interest; and

    -Eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.

  4. Compliance Obligation: In an enhancement from the proposal, broker-dealers must establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.

*Source: SEC website.

In fewer words: broker-dealers must demonstrate that any recommendations they make to a consumer are suitable relative to that client’s unique financial goals and objectives.

Suitability essentially means that a broker-dealer must have a reasonable basis to believe that a recommendation aligns with the consumer’s needs “based on the information obtained through the reasonable diligence of the broker-dealer to ascertain the customer’s investment profile” (source: JDSupra). But Reg BI further expands the concept of suitability by requiring that broker-dealers document the suitability of their recommendations on the basis of 13 key data points (covering everything from all relevant consumer-specific information to cost of the product).

Establishing Compliance through a System of Record

The onus has been placed on broker-dealers to modify their procedures and processes to ensure that they are compliant with the new rules. A critical element to establishing that compliance is through a system of record.

Agents and advisors will need to have a single source of truth that will warehouse all of their clients’ data, transactional or not. Having this established system of record is necessary to prove their compliance with Reg BI. It would, quite simply, be impossible to demonstrate that all their recommendations and transactions support Reg BI without it.

Software Saves the Day

Leveraging an inforce policy management solution like Proformex is essential to an agent’s continued compliance in the way they conduct their business. Our platform is a single, secure, omnichannel location in which they can store all relevant client data. That means all suitability information for your clients and any recommendations you make to them can be accessed from one place.

Taking it a step further, we also provide product alternatives to help agents address their clients’ ever-changing needs with automated annual policy reviews. Rather than asking your client to simply rely on you that the product you’re recommending is best for them, you’re empowered with the data we provide to you as an unbiased third party to show the client that in fact this is the product that aligns most closely with their needs. The report we provide to you – with the click of a button – is simplified in a way that makes the intricacies and nuances of life insurance easy for the consumer to understand.

To see how we provide you with a system of record for all your clients’ policies and accelerate the policy review process, visit our website and schedule a demo.

Written by Admin

Post a Comment

Featured