Regulation Best Interest is finally here. And while there are always a few stragglers, the vast majority of broker-dealers have been preparing for this day for more than a year, said Peter Wilson, managing director of compliance and regulatory consulting at Duff & Phelps, who has helped scores of broker-dealers prepare for today’s Reg BI debut.

The Securities and Exchange Commission’s new regulation, ostensibly designed to force broker-dealers to reduce costly conflicts of interest they pass on to consumers, will give the agency and its examiners an online, searchable version of every broker-dealer’s customer relationship summary—or Form CRS—which describes to retail customers any conflicts firms might have.

Which firms will the SEC focus on first as they begin to conduct compliance exams and audits?

Wilson said firms that have red flags will be identified and potentially subject to additional scrutiny as it relates to this rule.

“The SEC staff has spent a substantial amount of resources in developing technology they will utilize to aid and assist them in trying to identify firms they have an interest in looking at further,” he said.

The new disclosures requires broker-dealers to provide full and fair disclosure to retail customers before or when a recommendation is being made, laying out all material facts relating to the investment recommendation and describing the relationship between the customer and the broker-dealer. Brokers get two pages to tell customers what they do; fees and costs they charge; type and scope of services; and limitations on recommendations. Dually-registered representatives, who charge both fees and commissions, are allotted four pages to tell their stories.

While the SEC has an interest in focusing on certain firms that trigger red flags, the agency has made clear it’s incorporating Reg BI into routine exams across the board, Wilson said.

Because all firms’ filings are online, with hyperlinks, there is little information that firms are telling customers—at least in writing--that SEC examiners won’t be able to see, search, verify and cross-reference with firms’ other legal documents like Form ADV, BrokerCheck, exam documents, trading activity, marketing materials and even the personal attestations that brokers and employees make to their firms’ compliance officers.

“This will allow SEC staff to identify and do audit analysis on consistencies and inconsistencies in what firms are telling investors around fees and conflicts of interest, in addition to the disciplinary information they’re required to disclose on Form CRS and ADV,” Wilson said. “At a minimum this will certainly help the SEC streamline their exams to be able to drill down to crosscheck and focus on what firms are saying.”

This exercise of writing a Form CRS drives firms to look at at their product and strategy risks, which have been the overarching focus of regulators for a number of years—a focus on suitability of various investments and retirement accounts for customers. For the first time, firms that offer accounts that do not provide ongoing monitoring of customer accounts for what they’re charging will have to flag that fact in Form CRS for clients to digest.

“The fact that some firms aren’t monitoring accounts must be prominently disclosed,” Wilson said.

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