Regulation Best Interest (Reg BI) – Where Are We Now?

By Buddy Doyle and Evan Rosser

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On October 26, 2020 the SEC hosted a Reg BI/Form CRS roundtable event. Oyster CEO Buddy Doyle and Consultant Evan Rosser took this opportunity to add their input about where regulators are when enforcing Reg BI, and what we are hearing from our clients.  Reg BI is an ongoing compliance requirement, and now is the time for firms to take a look at the feedback from the regulators, their customers and their sales force.  Listen to learn what regulators are looking at, what other firms are doing and what your firm should be doing to comply with Reg BI.


Transcript provided by Temi transcript services

Oyster:  Welcome to the Oyster Stew podcast, where we discuss what’s happening in the industry based on what we see as we work with regulators and clients. Oyster consultants are industry practitioners – we aren’t career consultants. We’ve done your job and we know the issues you face. You can learn more about Oyster Consulting and the value we can add to your firm by going to our website –  

Buddy Doyle:  Hi everybody. I’m Buddy Doyle and I’m joined by Evan Rosser.  Today we’re here to talk about Reg BI. Evan, thank you so much for joining us today. It’s good to have you. So I guess the big question of the day is what are you observing as it relates to firms now that they’ve had Reg BI implemented for the last few months?  

Evan Rosser:  Well, thank you, Buddy. Well, what we’ve seen is probably a little bit of what the SEC has seen. They recently had an update conference on the Form CRS and Reg BI. While they have found that firms are generally, for the most part, making that good faith effort they’ve talked about to meet the content and format requirements, they’ve seen some deficiencies, let’s say, in some of the disclosures and the quality materiality or clarity of the disclosures. And this really goes back to something I know, Buddy, we talked about with our clients and firms during the run-up to Reg BI. During the preparation phase we really try to impress people that this was not a one and done requirement. I know I had some concerns that once they finished the Reg BI, once they finished the Form CRS, I was afraid some of them thought they were finished, and they’re not. This is an ongoing compliance obligation. Now is the time for firms to take a look at what’s the feedback they’re seeing. The other thing we’ve tried to impress on firms that we’ve spoken to is that the Form CRS and Reg BI, and especially the Reg BI, is going to be front and center in every customer complaint you have going forward. So now is the time that firms should start looking at how it’s working and what feedback they’re getting both from customers and from their sales force.  

Buddy Doyle:  Yeah, what’s interesting to me is, we talked about the disclosure requirements, and we certainly did a lot of work about that. We did a lot of work of inventorying conflicts and sort of building on the DOL work that was done a few years prior. I think it’s interesting, I haven’t noticed a massive change in sales practices by organizations. We may not see that yet. It seems like everybody did a great job on disclosures or an okay job, or they did what they did. I think most firms actually took the initiative to do training on Reg BI, at least so folks know what disclosures to deliver and when, but I haven’t seen wholesale changes in the sales practices at this point, nor did we really expect to. But I don’t know if you’ve seen a shift in products as a widespread thing or more of a niche.  

Evan Rosser:  No. So going forward, I think you’re going to find firms are looking at their product mix, but they’re offering, what their compensation is. Those kinds of changes in their product mix takes a little time. I’m not surprised that firms didn’t make those changes during the preparation for Reg BI but going forward the process has made them look at that. It’s made them look at their mix of products. It’s made them look at their compensation, and it wouldn’t surprise me if, going forward, there might be some of those changes as they look at some of the higher priced, lower performing products on their platform, as they look at where the revenue streams are and how that compensation measures up against other products and other firms. As I said, at the outset, the disclosures in your Reg BI are going to change because your product mix changes, your revenue streams change, your compensation changes. And all of that needs to be updated on a regular basis for the Reg BI. So I think you will see some product changes as firms look at their mix of products and look at their disclosures.  

Buddy Doyle:  Yeah, I think you’re right. And I also think the real impetus to change in the organizations that we work with is going to come out of a sort of re-tooled 3120 exam process or an Annual Review of the RIAs. I think you’re going to see some changes come out of that, and hopefully folks have taken a look at how they do their tests for 3120 and reoriented to the requirements of Reg BI to make sure that you’re meeting those and that you’re looking at the guidance notes that went along with that to help inform the test.  

Evan Rosser:  Yes. And you know, clearly one of the obligations here from Reg BI is conflict, either elimination or mitigation, and firms have proposed and implemented conflict mitigation for some of the products for some of the compensation. Now’s the time to start looking whether that mitigation is working and if it’s not, well, then that’s another reason why maybe some products might be dropped. Some revenue streams might be adjusted. So it’s really important that not only you have conflict mitigation procedures in place, but that they’re working and you’re testing them to make sure they work, and they really are addressing the conflict as you’ve identified that conflict in the Reg BI disclosures.  

Buddy Doyle:  So I think that’s going to lead not only to product changes, but compensation changes as well. I think we didn’t see; we saw some of that with the rule coming out, but we didn’t see that widespread. But as most firms do every year, they’re probably going through compensation planning now.  Most firms at least look at, if not amend, their compensation plans on a routine basis, usually annually, usually on a calendar year basis. It’ll be interesting to see firms that started their BI tech before year-end versus firms that sort of roll to a March 31st 3120 date (which was the original 3012 requirement) and see if there were any changes coming. But we certainly did see some. We didn’t see as much as I would have thought.  

Evan Rosser:  No, probably not. And again, I think part of that is those kinds of changes take time. They have to be rolled out slowly, sometimes across the sales force and across the product mix that your firm works with. So they might be coming as they go forward. And I think they should reach out. I think firms should reach out to their financial professionals to see what kind of feedback, if any, they’re getting from customers. What questions do they have as they use this? Are they in fact making sure that the client is getting the Reg BI disclosures when a recommendation is made? And these are the kinds of things firms need to look at now, because that’s what regulators are going to be looking at now. For firms that are capturing their client contacts in a CRM system, are they in there as they’re supposed to be? And importantly, and one that might be overlooked by some firms, if you’re a standalone broker-dealer, are your registered reps using the term advisor? These are the kinds of things you should be looking at for compliance with all the provisions of Reg BI.  

Buddy Doyle:  I’ll tell you this. Firms were kind of expecting, I think, Reg BI to be delayed. And I think a lot of the harder things to go through around changing your product mix and your compensation plans, I think folks didn’t see this really happening in the middle of this pandemic. The good news is you’ve had the opportunity to do your good faith effort to put your policies and procedures in place. I think the regulators have, at least from what they’re saying, good faith efforts are going to be rewarded, and I expect to have it, to your point, that they’re going to expect you to continue to evolve your business. I don’t think they’re going to be overly aggressive necessarily if it takes you to the end of the year to get a few things in place. Obviously, as you’re doing your testing, if you notice anything out there that was not up to your new standards, certainly you’ll want to fix those as quickly as you run across them. I think you’ll get a lot of credit for that. But Evan, you’re a former regulator. I am a former regulated. Sometimes I’m a little optimistic about those things, but does that seem similar to what you’re hearing from the SEC and FINRA?  

Evan Rosser:  Yeah, I think they are. I think they are trying to adhere to that good faith effort. But another thing I’ve told the firms that I’ve worked with, and I’ve spoken to is you might have some disagreements with the regulators on certain materiality decisions or that you’ve reached. As far as the materiality of certain conflicts. You might have some disagreements with the regulators. They might have some thoughts on the clarity of your disclosures, for example, but that you must have is accurate disclosures. You must make sure that they are accurate because that, to me, falls outside good faith. You must make sure that the disclosures you make, those revenue streams, those compensation disclosures that you make around a recommendation, must be accurate. I don’t think you’ll get much leeway if it is found that your disclosures are somehow not accurate.  

Buddy Doyle:  I’ve also heard from certain clients that have been examined a little criticism of the prominence of the disclosures.  

Evan Rosser:  Yes. And we’ve seen that quite a bit. And that’s another thing – make sure that it is on your website. There are a couple of firms that I’ve spoken to recently that, while they thought it was on their website, when they went to look, it wasn’t there. And as you say, it has to be prominent. While there’s not a lot of guidance in the rule about what prominence is, but the regulators will look for that prominence with their own definition. So yes, make sure that it’s both on the website and it’s prominently displayed there, and also that as you open accounts, as you are making recommendations, that in fact you’re testing that these disclosures are in fact being made, that they are getting to the customers.  

Buddy Doyle:  So I think this is all good advice. There’s probably a lot to do here in your organization, certainly looking at the way you’re doing your testing and making sure that you have amended how you go about that to look for the requirements of Reg BI. That is a big deal. If you haven’t trained your organization, please do so. It’s really important. People don’t know what to do just because it’s in a manual somewhere. You definitely need to train folks. This is a center piece right now, so we would expect that to continue to move forward. And then, even if you prominently disclose things through Form CRS, make sure your links work in there. If you’re linking to your ADV or to other documents, you’ve got to consistently test those links because, I tell you, what I have seen is regulators are very interested when they’re coming in to visit, to see what you did around Reg BI.  

Evan Rosser:  Yes. And it’s important to keep in mind that this is not simply a recommendation around an individual securities transaction. Reg BI applies to an investment strategy involving securities. It applies to account type recommendations, such as rollovers. So you need to make sure, and any good training is certainly going to cover this, but make sure that those kinds of recommendations are being accompanied by the Reg BI disclosures.  

Buddy Doyle:  Evan, thank you so much.  As always. It’s really great when you share your wisdom with me and it’s nice of you to let me record it so we can share it with everybody else too. So thank you for all you’re doing on the Reg BI front. It’s really great to have experts like you on our team. It makes me feel good about the work we do with our clients.  So thank you so much.  

Evan Rosser:  You’re very welcome.  

Oyster:  Thanks for listening. And if you like what you heard, make sure to follow the Oyster Stew podcast on whatever platform you listen to. If you’d like to learn how we can help firms start, run, protect, and grow their business, visit our  

About The Podcast Speakers
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Buddy Doyle

As the CEO of Oyster Consulting, Buddy Doyle has led the charge to create a successful organization built on the belief that transforming experienced industry practitioners into consultants adds more value to our clients.

Photo of Evan Rosser

Evan Rosser

Evan Rosser is an experienced and respected securities industry professional with over 25 years of experience managing complex securities investigations for NASD/FINRA and providing compliance expertise to both broker-dealers and investment advisors.  Evan has served as CCO for both investment advisors and broker-dealers, as well as providing compliance support to numerous broker-dealers and registered investment advisors.

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