SEC’s Reg BI at year 5: ‘A glass half-full’ as challenges remain

After five years, many advisors and brokers remain divided on the Securities and Exchange Commission’s Regulation Best Interest.

Known colloquially as Reg BI, the rule was developed under the first Trump administration and left to stand by the Biden-era Securities and Exchange Commission leadership. It commits the industry to its preferred best-interest standard.

But some industry experts consider it a work in progress, even after five years. The SEC has brought only a handful of headline Reg BI cases and most discipline sits with the Financial Industry Regulatory Authority, said Lawrence Klayman, founding partner at Klayman & Toskes, a securities law firm.

Those FINRA penalties rarely exceed six figures, Klayman added, calling the fines “hardly a deterrent for large broker-dealers.”

“Reg BI is a glass-half-full,” Klayman said. “It pushed brokers to produce cleaner disclosure and collect mountains of documentation, yet the rule’s bite still feels more like a questionnaire than a guard dog.”

But advisors who have long been fiduciaries, like Richard E. Craft, CEO of Wealth Advisory Group, are happy to see standards rising for non-fiduciaries in the business.

“I think it serves as a reminder to people in your day to day business and you're making recommendations, you trust that people are ethical and they do have the best interests of clients,” Craft said. “But having a regulation which you could violate and get yourself in trouble I think is a lot more formalized than simply not having anything that particularly shines a spotlight on it."

Four conditions to be met

Proposed in 2018 and adopted a year later, Reg BI took effect on June 30, 2020. It falls under the Securities Exchange Act of 1934 and requires four conditions:

Disclosure. Broker-dealers must provide certain disclosures to clients before making investment recommendations or when the recommendation is made. This disclosure must include all material facts about the investment products or services being recommended.

Care. The care obligation requires broker-dealers to exercise reasonable diligence, care and skill when making investment recommendations.

Conflict of interest. Broker-dealers must establish, maintain and enforce written policies and procedures to prevent conflicts of interest and address them when they occur.

Compliance. The SEC also requires broker-dealers to establish policies that ensure compliance with the regulation, including record-making and recordkeeping requirements.

“Some advisors still wrestle with fuzzy concepts like ‘reasonably available alternatives,’ and recent surveys show compliance teams debating what documentation is truly required,” Klayman noted.

After five years, those “core components” of disclosures, avoiding conflicts and doing due diligence are areas of focus for both regulators and firms, said A. Valerie Mirko, partner and leader of Armstrong Teasdale’s Securities Regulation and Litigation practice.

A new industry around compliance technology continues to mature as firms ponder strategies.

This “can lead to trouble spots when comparing firms that have optimized technology for Reg BI compliance versus firms that have not,” Mirko explained. “Both types of firms are complying, but the firms that are leveraging technology less may not be able to track certain items at the same level of granularity than more technology-forward firms.”

There are a number of Reg BI-related technology solutions including, tracking reasonably available alternatives, cataloguing conflicts, or managing the flow of information to individual financial advisors as part of meeting and documenting compliance, Mirko noted.

The SEC set its 2025 examination goals to focus on the use of artificial intelligence and other emerging technologies. “Examinations relating to Reg BI may focus on recommendations using automated tools or other DEPs [digital engagement practices]” the agency announced in November.

‘Derisked the business’

Despite ongoing challenges and critics, Reg BI has changed the business, Mirko said.

“There is generally a sense about industry firms that Reg BI has derisked the business,” she explained. “For example, securities that may have in the past be the reason for arbitration complaints now are simply no longer on the product shelf.”

The critic’s corner includes former SEC commissioner Robert Jackson, Jr., who cast the lone vote against Reg BI. In comments made last year, he repeated comments made in 2019 that the rule is “muddled” and “vague.”

“The rule never defines what it requires firms to do to meet a best interest standard,” Jackson said during a panel hosted by the Institute for the Fiduciary Standard. “It doesn't say what kinds of harmful conflicts firms are prohibited from engaging in. It's not clear to me whether enough has been done to give firms direction on that.”

Klayman advocates for two fixes to “move the needle” on Reg BI.

“First, give investors a private right of action so the rule isn’t enforced solely by regulators’ bandwidth,” he said. “Second, require firms to show a client-level cost–benefit analysis for complex or high-fee products, not just a comparison checklist. Until those changes arrive, Reg BI feels more like a well-intentioned disclosure upgrade than a full fiduciary standard. It's progress, but not yet the safety net the SEC envisioned.”

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.