Reg BI and Form CRS

Regulatory Obligations and Related Considerations

Regulatory Obligations

The SEC’s Regulation Best Interest (Reg BI) establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make recommendations to retail customers of any securities transaction or investment strategy involving securities, including account recommendations. Pursuant to this standard, a broker-dealer and its associated persons must not put their financial or other interests ahead of the interests of a retail customer. The standard of conduct established by Reg BI cannot be satisfied through disclosure alone.

Separately, whether they make recommendations or not, member firms that offer services to retail investors must file and provide retail investors with a Form CRS, a brief relationship summary that discloses material information about the firm in plain language (e.g., investment services provided, fees, conflicts of interest, legal and disciplinary history of the firms and associated persons).

Reg BI and Form CRS became effective on June 30, 2020, and FINRA has been examining member firms’ implementation of those obligations throughout 2021-2023. FINRA will share further findings as we continue to conduct exams and gather additional information on member firms’ practices.

Related Considerations¹

Reg BI

Care Obligation

• When your firm or associated persons make a recommendation to a retail customer, do they exercise reasonable diligence, care and skill to form a reasonable basis to believe that the recommendation is in the best interest of that particular retail customer by:
  • understanding and considering the potential risks, rewards and costs associated with the recommended product, investment strategy, account type, or series of transactions;
  • obtaining and analyzing sufficient information about the retail customer’s investment profile; and
  • considering a sufficient array of reasonably available alternatives, including lower-cost or lower-risk alternatives, if any, your firm offers?
• Does your firm provide guidance to its associated persons on how to evaluate costs and reasonably available alternatives when making recommendations?
• Has your firm and its associated persons considered applying heightened scrutiny as to whether recommended investments that are high-risk, high-cost, complex or represent a significant conflict of interest are in a retail customer’s best interest?
• For recommendations of types of accounts, does your firm and its associated persons:
  • establish a reasonable understanding of the characteristics of a particular type of account by considering factors such as:
    • the services and products provided in the account (including ancillary services provided in conjunction with an account type, such as account monitoring services);
    • alternative account types available;
    • whether the account offers the services requested by the retail customer; and
    • whether these factors are consistent with the retail customer’s investment profile?
  • consider the projected costs of the recommended account, including, for example, account fees (e.g., asset-based, engagement, hourly), commissions and transaction costs (e.g., markups and markdowns), tax considerations, as well as indirect costs, such as those associated with payment for order flow and cash sweep programs?
• When making account rollover or transfer recommendations, including retirement accounts:
  • do your firm and its associated persons ensure that they have a reasonable basis to believe that the rollover or transfer itself, the account type being recommended, and any securities or investment strategies recommended are in the retail customer’s best interest; and
  • do your firm and its associated persons consider, in addition to the general considerations for all account and securities recommendations, specific factors potentially relevant to rollovers or transfers, such as costs (e.g., costs associated with closing out securities, if the customer has to sell them as a result of the recommendation to transfer), level of services available, features of the existing account, available investment options, ability to take penalty-free withdrawals, application of required minimum distributions, protection from creditors and legal judgments, and holdings of employer stock?
• Does your firm and do its associated persons understand how they should consider reasonably available alternatives and, to the extent required by your firm’s policies and procedures, when to document these considerations?
  • Do your firm and its associated persons consider the potential risks, rewards and costs associated with reasonably available alternatives?
  • Has your firm developed a process to identify the scope of reasonably available alternatives that its associated persons should evaluate?
    • Do your firm and its associated persons begin by considering a broader array of investments or investment strategies generally consistent with the retail customer’s profile, before narrowing the scope of a smaller universe of potential investments or investment strategies, as the analysis becomes more focused on meeting the best interest of a particular retail customer?
  • Do your firm and its associated persons consider reasonably available alternatives to high-risk and complex products when making recommendations to retail customers? If so, how?
  • When recommending a higher-cost or higher-risk product, do your firm and its associated persons consider whether any reasonably available alternatives are less costly or lower risk, and consistent with the retail customer’s investment profile?

Conflict of Interest Obligation

• Does your firm establish, maintain and enforce written policies and procedures that are tailored to your firm’s business model to identify and at a minimum disclose, or eliminate, all conflicts of interest associated with a recommendation?
• To identify conflicts of interest, does your firm consider the following non-exhaustive list of practices:
  • defining conflicts in a manner that is relevant to the firm’s business;
  • evaluating whether conflicts arise in different aspects of the relationship with the retail customer, including account recommendations, product menus, allocation of investment opportunities among retail customers and cash management services;
  • establishing a process to identify the types of conflicts the firm and its associated persons may face and how such conflicts may impact recommendations;
  • providing for an ongoing process to identify conflicts arising, for example, in connection with changes to the firm’s business or structure, changes in compensation structures or introduction of new products or services; and
  • establishing training programs regarding conflicts of interest that addresses roles and responsibilities (among other considerations)?
• With respect to account recommendations, does your firm consider the following non-exhaustive list of practices that can help your firm meet its obligations with respect to conflicts of interest by:
  • avoiding compensation thresholds that disproportionately increase compensation through openings of certain account types;
  • adopting and implementing policies and procedures reasonably designed to minimize or eliminate incentives, including both compensation and non-compensation incentives, for employees to favor one type of account over another;
  • implementing supervisory procedures to monitor recommendations that involve the rollover or transfer of assets from one type of account to another (such as recommendations to roll over or transfer assets in an Employee Retirement Income Security Act of 1974 (ERISA) account to an IRA); and
  • adjusting compensation for financial professionals who fail to adequately manage conflicts of interest associated with account recommendations?
• With respect to your firm’s compensation practices for associated persons, does your firm assess:
  • whether the firm’s compensation practices incentivize its associated persons to offer recommendations that are not in their retail customers’ best interests;
  • whether the basis for calculating associated persons’ compensation has the effect of passing along firm-level conflicts to their associated persons, such as incentivizing associated persons to recommend certain products, account types or services to retail customers that are most profitable for the firm; and
  • whether its associated persons also receive other types of compensation or benefits that may create conflicts of interest that would need to be addressed under Reg BI (and whether the firm has policies and procedures and other supervisory systems in place to identify and address any such conflicts)?

Disclosure Obligation

• Does your firm have adequate controls to assess whether it provides disclosures in a timely manner and, if provided electronically, in compliance with the SEC’s electronic delivery guidance?
• Does your firm provide dually registered associated persons with adequate guidance on how to determine and disclose the capacity in which they are acting?
• Do your firm and its associated persons supplement firm disclosures when appropriate (e.g., an associated person’s licensure only permits them to recommend a limited range of securities products offered by your firm, an associated person who is a dual-registrant disclosing the capacity in which he or she is acting at the time of the recommendation, an associated person has additional material conflicts of interest related to the recommendation beyond those disclosed by your firm)?
• How does your firm document and track the delivery of Reg BI-related disclosure documents to retail customers?
• Do your firm and its associated persons periodically evaluate the materiality of any changes related to the scope and terms of their relationship with their customer to determine whether they are required to update the disclosures they provided to their retail customers?

Compliance Obligation

• Are your firm’s policies and procedures tailored to address your firm’s business lines, products and services, customer base and conflicts of interest?
• Do your firm’s policies and procedures:
  • specify the supervisory steps and reviews appropriate supervisor(s) should take and their frequency; and
  • note how supervisory reviews should be documented?
• To prevent your firm from placing its interest ahead of the retail customers’ interest, does your firm continue to periodically re-evaluate the adequacy of its policies and procedures and related processes to achieve compliance with Reg BI, including re-evaluating its conflicts of interest and disclosures, in connection with changes to its product mix or business activities?
• Does your firm evaluate and test the adequacy of its systems and controls considered to be critical in supporting compliance with Reg BI? For example:
  • how does your firm test its policies and procedures to determine if they are adequate and performing as expected; and
  • does your firm make enhancements to its supervisory system, procedures and processes based on feedback it has received from internal reviews, regulatory examinations or SEC and FINRA guidance concerning Reg BI compliance—if so, does your firm incorporate these enhancements into timely training provided to associated persons?
• If your firm initially determined that it had no obligation to comply with Reg BI, has it periodically re-evaluated its initial determination in light of any changes to its business practices (e.g., acquiring new business lines or changing how it interacts with customers)?
• Has your firm considered how it will demonstrate (via documentation or otherwise) that it has met its obligations with respect to the basis for recommendations, particularly, though not exclusively regarding:
  • recommendations of account types;
  • recommendations of complex, risky or illiquid securities; or
  • recommendations that appear inconsistent with a retail customer’s investment profile?

Form CRS

• Does your firm periodically evaluate changes to its business mix or products or services offered, or otherwise periodically re-evaluate the accuracy of information (e.g., disciplinary history) in its Form CRS, to determine whether it is required to update and file an amended Form CRS? Does your firm have processes in place to communicate (without charge) any changes made to the Form CRS to retail investors who are existing customers?
• How does your firm track and document the delivery of Form CRS to retail investors?

Findings and Effective Practices

Findings

Reg BI

• Failure to Comply with The Care Obligation:
  • Failing to conduct a reasonable investigation of offerings prior to recommending them to retail customers (e.g., unable to reasonably evidence due diligence efforts regarding the issuer; relying solely on the firm’s past experience and knowledge with an issuer based on previously completed offerings).²
  • Making recommendations of securities or investment strategies involving securities (including account type) without a reasonable basis to believe that they were in the best interest of a particular retail customer.
  • Recommending a series of transactions that were excessive in light of retail customers’ investment profiles and factors such as high cost-to-equity ratios and high turnover ratios.
  • Limiting consideration of cost solely to sales charges instead of also considering other relevant costs and fees, such as product or account-level fees, when recommending a product.
  • Not maintaining profile information for retail customers in accordance with Exchange Act Rule 17a-3(a)(35), thereby undermining the firm and its associated persons’ ability to demonstrate compliance with the Care obligation (e.g., not obtaining complete or current customer profile information for new or existing retail customers).
  • Recommending complex or illiquid products that are inconsistent with the retail customer’s investment profile by, for example, exceeding concentration limits specified in a firm’s policies, or comprising a sizable portion of a retail customer’s liquid net worth or securities holdings.
• Failure to Comply with Conflict of Interest Obligation:
  • Not identifying conflicts and disclosing, mitigating or eliminating, as appropriate, conflicts of interest associated with recommendations of securities transactions or investment strategies involving securities.
  • Not identifying and mitigating (i.e., modifying practices to reduce) conflicts of interest that create an incentive for an associated person to make securities recommendations that place the interests of the associated person or the firm ahead of the interests of the retail customer, including:
    • not properly supervising or enforcing policy restrictions on certain types of recommendations (e.g., transactions in affiliated private funds) intended to mitigate or eliminate potential conflicts; and
    • not identifying and mitigating potential conflicts regarding revenue or fee sharing arrangements with fund managers for offerings that were recommended to retail customers.
  • Not identifying and addressing all potential conflicts of interest relevant to a firm’s business model, including, but not limited to, material limitations on securities or investment strategies and conflicts associated with these limitations.
• Failure to Comply with Disclosure Obligation:
  • Not providing retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with these retail customers or related to conflicts of interest that are associated with the recommendation, including:
    • material fees received as a result of recommendations made (e.g., revenue sharing, or other payments received from product providers or issuers, as well as other fees tied to recommendations to roll over qualified accounts);
    • potential conflicts of interest;
    • material limitations in securities offerings; and
    • transaction-based fees that were inconsistent with—and, in some cases, materially higher than—those outlined in Reg BI customer disclosures.
  • Associated persons, firms, or both, improperly using the terms “advisor” or “adviser” in their titles or firm names, even though they lack the appropriate registration.
• Failure to Comply with Compliance Obligation:
  • Failing to adopt and implement written policies and procedures that are reasonably designed to achieve compliance with Reg BI by, for example, stating the rule requirements but failing to identify how the firm will comply with those requirements (e.g., requiring associated persons to consider costs and reasonably available alternatives when making recommendations, but not specifically addressing or detailing how associated persons should do so).
  • Failing to develop adequate controls or developing adequate controls but not memorializing these processes in their WSPs.
  • Failing to enforce Reg BI procedures or supervisory processes for compliance, such as outlining documentation requirements but failing to implement any process to confirm associated persons are complying with the firms’ requirements.
  • Failing to maintain sufficient systems or controls supporting firms’ ongoing trade surveillance to identify potential non-compliance with Reg BI, such as relying on manual review methods that were inconsistently performed or controls that were not reasonable given firms’ volume of transactions.
  • Failing to conduct adequate or ongoing training of associated persons regarding the use of systems and processes established to support Reg BI compliance.
  • Failing to ensure that recommendations involving variable annuities were compliant with Reg BI (e.g., not adequately collecting and retaining key information on variable annuity transactions; and not sufficiently training registered representatives and supervisors to determine whether variable annuity exchanges complied with the standards of Reg BI).³

Form CRS

• Deficient Form CRS Filings: Firms’ Form CRS filings significantly departing from the Form CRS instructions or SEC guidance by:
  • exceeding prescribed page lengths;
  • omitting material facts (e.g., description of services offered, limitations of the firm’s investment services, incomplete or inaccurate cost disclosures);
  • inaccurately representing the firm’s or its associated persons’ disciplinary histories, including inappropriate qualifying language to explain disciplinary history;
  • failing to describe, or inaccurately describing types of compensation and compensation-related conflicts;
  • incorrectly stating that the firm does not provide recommendations; and
  • changing or excluding language required by Form CRS.
• Failing to Properly Deliver Form CRS: Failing to deliver or not creating a record of the date on which your firm provided each Form CRS to each retail investor, including any Form CRS provided before such retail investor opened an account.
  • If the relationship summary is delivered electronically, failing to present it prominently in the electronic medium and make it easily accessible for retail investors (e.g., by solely placing a link to the CRS in an email footer below the signature line; by including the CRS among other disclosures in a zip file attachment without any mention of the CRS in the email).
• Failing to Properly Post Form CRS: For firms that have a public website, failing to post or failing to post prominently, in a location and format that is easily accessible to retail investors, the current Form CRS (e.g., requiring multiple click-throughs or using confusing descriptions to navigate to the Form CRS).
• Failing to Adequately Amend Form CRS: Firms not in compliance with Form CRS in relation to material changes because they:
  • failed to timely re-file in CRD (i.e., within 30 days of the date when Form CRS became materially inaccurate); or
  • failed to communicate or timely communicate changes to existing retail investors (e.g., delivering amended summary, with required exhibits, showing revised text or summarizing material changes or communicating the information through another disclosure within 60 days after the updates are required to be made—90 days total from the date when Form CRS became materially inaccurate).
• Misconstruing Obligation to File and Deliver Form CRS: Incorrectly assuming a firm is not subject to the Form CRS delivery obligation because of, among other things, their customer base (e.g., retail investors who are high-net-worth individuals) or the services they offer (e.g., selling investment company products held directly by an issuer, self-directed accounts).

Effective Practices

Care Obligation

• Costs and Reasonably Available Alternatives: Including in procedures and processes specific factors related to evaluating costs and reasonably available alternatives to recommended products, including but not limited to:
  • providing clear guidance to associated persons making recommendations on how to evaluate costs and reasonably available alternatives, such as by:
    • using worksheets, in paper or electronic form, to compare costs and reasonably available alternatives;
    • creating notes or documents in a similar format to evaluate recommended transactions and provide information on the retail customer’s financial situation, needs and goals (and substantiate why that specific recommendation was in the retail customer’s best interest);
    • specifying the relevant factors to consider when evaluating costs (e.g., deferred sales charges) and reasonably available alternatives (e.g., similar investment types or less-complex or less-risky products available at the firm); or
    • updating client relationship management (CRM) tools to automatically compare recommended products to reasonably available alternatives.
  • setting forth clear supervisory processes that address reviews and firm-required documentation;
  • sampling recommended transactions to evaluate how costs and reasonably available alternatives were considered;
  • outlining firm documentation practices; and
  • discussing limitations on complex or higher-risk products, such as firm concentration guidelines or minimum liquid net worth requirements.
• Heightened Scrutiny of Investments for Retail Customers: Mitigating the risk of making recommendations that might not be in a retail customer’s best interest by:
  • establishing product review processes to identify and categorize risk and complexity levels for existing and new products; and
  • applying heightened supervision to recommendations of products, or investment strategies involving securities, that are high risk, high cost, complex or represent a significant conflict of interest, or limiting such recommendations to specific customer types.

Conflict of Interest Obligation

• Policies and Procedures: Establishing and implementing policies and procedures to address conflicts of interest by:
  • using conflicts committees or other mechanisms, or creating conflicts matrices tailored to the specifics of the firm’s business that address, for example, conflicts across business lines and how to eliminate, mitigate or disclose those conflicts;
  • revising commission schedules for recommendations within product types to flatten the percentage payout rate to employees; and
  • broadly prohibiting all sales contests, regardless of whether they are required to be eliminated under Reg BI.

Disclosure Obligation

• Implementing Systems Enhancements for Tracking Delivery of Required Customer Documents: Tracking and delivering Form CRS and Reg BI-related documents to retail customers in a timely manner by:
  • automating tracking mechanisms to evidence delivery of Form CRS and other relevant disclosures; and
  • memorializing delivery of required disclosures at the earliest triggering event.
• Providing Clear Disclosure on Account Type Recommendations: Providing retail customers with clear, accessible materials that allow them to compare the features, benefits and costs of certain account type recommendations (e.g., rollovers).

Compliance Obligation

• Implementing New Surveillance Processes: Monitoring associated persons’ compliance with Reg BI by:
  • conducting regular reviews to confirm that their recommendations meet Care Obligation requirements, including system-driven alerts or trend criteria to identify:
    • account type or rollover or transfer recommendations that may be inconsistent with a retail customer’s best interest;
    • products that are high risk, high cost, complex or represent a significant conflict of interest;
    • excessive trading; and
    • sale of same product(s) to a high number of retail customers.
  • monitoring communication channels (e.g., email, social media) to confirm that associated persons who were not investment adviser representatives (IARs) were not using the word “adviser” or “advisor” in their titles.
• Incorporating Reg BI-specific reviews into the branch exam program, in addition to other ongoing monitoring and surveillance.
• Focusing on areas such as documenting Reg BI compliance and following the firms’ Reg BI protocols (as part of overall Reg BI compliance efforts).

Additional Resources

• FINRA
  • SEC Regulation Best Interest Key Topics Page
  • 2023 FINRA Annual Conference: Current Issues Under Regulation Best Interest and Form CRS
  • Regulatory Notice 23-20 (FINRA Highlights Available Guidance and Resources Related to Regulation Best Interest)
• SEC
  • Regulation Best Interest Guidance Page
  • Frequently Asked Questions on Form CRS (December 8, 2023)
  • Staff Bulletin – Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations (April 30, 2023)
  • Observations from Broker-Dealer Examinations Related to Regulation Best Interest (January 30, 2023)
  • Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest (August 3, 2022)
  • Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors (March 30, 2022)
  • Staff Statement Regarding Form CRS Disclosure (December 17, 2021)
  • You may submit a question by email to [email protected]; additionally, you may contact the SEC’s Division of Trading and Markets’ Office of Interpretation and Guidance at (202) 551-5777.