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Regulation Best Interest (Reg BI)

On June 5, 2019, the SEC adopted Regulation Best Interest (Reg BI) under the Securities Exchange Act of 1934. Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.

As part of the rulemaking package, the SEC also adopted new rules and forms to require broker-dealers and investment advisers to provide a brief relationship summary, Form Customer Relationship Summary (CRS) to retail investors.

Firms must comply with Reg BI and Form CRS by June 30, 2020.

There are three disclosure obligation of the broker; disclose all fees, either mitigate all conflicts or disclose them clearly, explore all investment options available to meet the customer’s investment objectives.

What does REG BI mean for retirement plan participants?

  • Reg BI provides protections to participants and requires that the recommendations they receive from a financial professional or firm be in their best interest.
  • A financial professional or firm can’t recommend their investment product unless they have determined through a reasonable process that the product is a good fit and in the participant’s best interest. For example, a retirement plan provider cannot recommend a proprietary managed account or IRA rollover to a participant without having performed an analysis to determine if it’s in the participant’s best interest.
  • Prior to Reg BI, rollover recommendations to proprietary products were not subject to a best interest standard. Now they are.

What does REG BI mean for retirement plan sponsors?

  • Plan sponsors should determine whether a retirement plan provider will offer recommendations to participants. If yes, the plan sponsor should understand what types of recommendations and ensure that the provider has structures in place to comply with Reg BI. (If the plan is subject to ERISA, the provider may also be acting as an ERISA fiduciary.)