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Remaining compliant with the SEC’s new rule.
After various attempts over the last several years to enhance the standard of care that brokerage firms owe to retail clients, the Regulation Best Interest (Reg BI) guidelines that the SEC adopted on June 15, 2019, will be effective on June 30, 2020.
What is Reg BI?
At its core, Reg BI is designed to create greater transparency to protect the retail investors who broker-dealers serve. The new standard of care mandates that broker-dealers put their clients’ best interest above their own personal gain and disclose certain information when making financial and investment recommendations. In the eyes of the SEC, a recommendation is anything that can be seen as a call to action, including recommendations for investment strategies, investment options, or types of accounts.
Similar to the way a medical practice is expected to document all patient data and only make informed medical recommendations that benefit patients’ health, the SEC’s newest regulation applies the same ideas to brokerage practices. Since Reg BI’s stricter rules could push more liability onto broker-dealers, it’s important for them to be familiar with the new rule’s four obligations to help protect their own practice.
The Four Obligations under Reg BI
The care and disclosure obligations will most impact broker-dealers’ day-to-day activities. However, it’s critical that broker-dealers meet all four obligations to ensure compliance with Reg BI and protect their clients and their own firm.
Reg BI Outside the Office
Because broker-dealers are still bound to Reg BI’s obligations in any type of environment, they should cautiously approach casual interactions with retail clients to protect their practice.
Broker-dealers are not allowed to provide investment recommendations without following the new rule’s standard of care and disclosure requirements regardless of who they are speaking with and where they are holding that conversation.
For example, a broker-dealer would not be able to propose to a visiting neighbor that she should establish a 529 account to save for her children’s education. However, a broker-dealer may say that their firm can provide a selection of accounts that can help save for her children’s future.
Remaining Compliant Under Reg BI
Implementing and following the four obligations of Reg BI may be more difficult under the unusual circumstances of the coronavirus pandemic. Please contact our Clearing Services division by calling (214) 859-9100 or emailing clearingsales@hilltopsecurities.com if we can be of help.
Hilltop Securities, Inc. (HTS) is a registered broker-dealer, registered investment adviser and municipal advisor firm that does not provide tax or legal advice. This information is intended for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product or service. HTS is a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH) located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270, (214) 85