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.

Dually-registered firms and reps must also disclose that they go back and forth between offering advisor services with monitoring, along with pure, transactional brokerage, which can be dicey to explain and even more dicey for customers to understand.

Advisor relationships carry a fiduciary responsibility, while brokerage relationships require only that the rep acts in the customer’s best interest.

“That has sometimes been difficult for advisors to address—the discussion of how their reps cross the line between broker and advisor,” Wilson said. “Most of our clients do have hybrid reps. While certainly there can be disclosures related to it, firms are also using conversation starters where they’re highlighting to the prospective customer that this is an area that they should explore further through questions such as ‘how will you choose investments for me’ and ‘why are you choosing this account for me.’”

He added that as regulators and compliance professionals see how others in the industry handle stickier subjects, it will provide the intelligence needed to allow firms to communicate and do due diligence with greater ease and consistency.

He also urged broker-dealers to double check not only the verbiage in their Form CRS, but their training and supervision around the new disclosure.

“You have to make sure you’ve considered all of the other procedures and the staff that needs to be trained and tied to all client events especially account openings,” Wilson said.

Will this mean broker-dealers, particularly those that use riskier retail accounts and practices, will have fewer places to hide?

“I think it is certainly making the industry more transparent and the regulators are leveraging all the tools and technology at their disposal to support that transparency,” he said.

In terms of giving the industry some type of grace period for making a good-faith effort in filing their Form CRSs as industry practices evolve, Wilson noted that based on other new regulations and disclosures, the SEC generally gives firms 12 to 18 months to polish their disclosures.

“There are always stragglers for new regulations, that is the dynamic of the industry, but I think the industry has adequate time to prepare, analyze and engage the regulators on this,” he said.