Reg BI | SEC Releases Bulletin for RIAs and BDs
SEC Releases
Brief Introduction
Last week, the SEC released a bulletin explaining the standards of conduct for Registered Investment Advisers (“RIAs”) and Broker Dealers (“BDs”) under Reg BI and the Investment Advisers Act.
This bulletin is intended to answer questions that the SEC is frequently asked about these regulations including the care obligations.
As a major priority for examinations in 2023, it is important for Firms to be aware of this regulation and how it may affect them.
Reg BI Requirements for Investment Advisers
- Financial Professionals must act in the best interest of their customer when discussing investment strategies based on securities.
- RIAs must understand all the risks, rewards, and costs involving the products, account types, investment strategies, and volume of transactions offered to the customer.
- The investment profile of retail investors should be known thoroughly by the RIAs providing services.
- There should be a well-documented and defendable explanation available for the recommendations to prove they were made in the best interest of the customer.
Key Takeaways from the SEC Bulletin
- Understanding Investment Strategies
- RIAs are responsible for their personal understanding of the products they are offering, and a Firm’s approved list of investments will not be sufficient.
- RIAs should understand the objectives, costs, expected returns, and the likelihood of meeting the customer’s financial goal when making recommendations.
- Costs are always considered a relevant factor when providing advice on securities.
- Understanding Customer Profiles
- Multiple factors should be considered when providing advice, including the investor’s investments, assets and debts, marital status, tax status, age, investment time horizon, liquidity needs, risk tolerance, investment experience, investment objective, and financial goals.
- Understanding your customers should be an ongoing process.
- Advice should not be given if an RIA does not have enough information to know what would be in an investor’s best interest.
- Individual Tax status should be considered when offering tax aware securities.
- Considering Reasonable Available Alternatives
- Firms should establish a process for RIAs to establish and understand their responsibility of considering alternatives to their recommendations.
- Moving from a broad number of recommendations to a more focused and narrow recommendation upon further analysis is a good general strategy.
- All investment possibilities do not need to be considered, but enough investments should be to indicate the RIA has a reasonable basis for their advice.
- A “most appropriate” available option is not defensible when the option to not invest may be in the best interest of the customer.
Vigilant’s Conclusion
Regulation BI is listed as a major Exam priority for 2023. The first Firm was charged under Regulation BI in June of 2022.
Firms are encouraged to adopt written policies and procedures that guide their RIAs in properly considering the best interests of their clients when making recommendations, and thoroughly documenting the basis for these recommendations. This will make it significantly easier if your Firm is required to demonstrate Compliance to regulators.