Brokers face heavy lift to implement Reg BI by next year

Firms must establish disclosure, mitigation procedures for each line of business

Jun 7, 2019 @ 4:30 pm

By Mark Schoeff Jr.

The clock is ticking for brokers-dealers to modify their operations to comply with advice reform regulations approved earlier this week by the Securities and Exchange Commission.

The implementation deadline is June 30, 2020. But those 12 months could fly by for firms as they put in place policies and procedures required by Regulation Best Interest, a measure designed to raise the broker standard of care from suitability.

They will have to examine sales practices, financial incentives and material conflicts of interest while writing new policies and procedures and drafting new disclosures, according to Daren Domina, partner at Haynes and Boone.

"While a year sounds like a long time, firms, especially larger ones, will have to get started on this process relatively quickly," Mr. Domina said.

His reasoning was that Reg BI applies on a transaction-by-transaction basis, and large firms sell many investment products. They will have to come up with systems for disclosing and mitigating conflicts of interest related to those sales.

The burden could be bigger for smaller independent broker-dealers, who lack the compliance resources of their larger brethren, said Fred Reish, partner at Drinker Biddle & Reath.

The rule doesn't define best interest or mitigation. Nonetheless, firms will have to come up with ways to determine they've satisfied both requirements.

In an InvestmentNews webcast Thursday, Mr. Reish said brokers will have to institute mitigation and best interest procedures for each of their lines of business — for instance, annuities, mutual fund portfolios and individual brokerage accounts.

"What are your practices going to be?" Mr. Reish said. "Then you develop policies, procedures, training and supervision around that. That's a lot to get done in 12 months, if you don't have a really strong corps of people in the home office."

SEC member Hester Peirce acknowledged the potentially heavy lift facing brokers in a statement at Wednesday's open meeting before her vote in favor of the rule package.

"The compliance period we are adopting is a very ambitious one," she said. "Firms will need to start their implementation efforts immediately. I want you to update us frequently about how the process is going, what challenges you are facing, where guidance is needed, how we can coordinate effectively with Finra, and whether you think you will need more time."

The commission is setting up an implementation committee to help firms meet their new requirements. Financial advisers can ask questions during the transition by emailing

Under Reg BI, brokers must disclose their fees and types of services provided, and disclose and mitigate or eliminate conflicts of interest. In what the SEC called an enhancement to the original Reg BI proposal, the final version requires brokers to take into consideration the cost of investment products as well as the range of reasonably available products.

"It's going to be about documenting recommendations," said Brendan McGarry, partner at Kaufman Dolowich & Voluck. "You're going to have to have a reason for everything."

The final Reg BI also applies to account recommendations and to rollovers from company retirement plans to individual retirement accounts. Showing compliance in that area will put a premium on data collection, according to Mr. Reish.

"The only way I can think of mitigating is to have a really strong process for gathering information, for evaluating it and for making a recommendation that's in the best interest — not just suitable — of the investor and then supervise the application of that process," he said.


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