Reg BI Compliance: Q&A with Cetera Chief Legal Officer Lisa Gok 

Reg BI, which took effect in June 2020, introduced a “best interest” requirement for broker-dealers and affiliated people who give investment advice to retail clients. 

We spoke with Cetera’s chief legal officer, Lisa Gok, who spent 11 years at the Securities and Exchange Commission and has been involved in compliance ever since, regarding Reg BI and the wider regulatory landscape in the wealth management industry. 

Gok addressed what wealth managers can do better in satisfying FINRA and SEC requirements and if Reg BI indeed goes far enough in achieving regulators’ requirements, among other issues. 

CM: Explain the critical aspects of Reg BI and the framework on investment advice, and its implications for financial advisors and investors. 

Gok: Reg BI created a series of new obligations for financial professionals, all designed to require them to act in the best interest of the customer. The most substantive changes are: 

• The care obligation: Requires financial professionals to compare all investment recommendations to reasonably available alternatives based on objective criteria, including cost, historical performance and relative risk. 
• The conflict obligation: Requires firms and financial professionals to disclose and manage material conflicts of interest, primarily those caused by compensation practices. 
• New disclosure requirements: Includes the delivery of Form CRS and supplemental information relating to conflicts of interest. 

These new obligations have substantially increased the burdens for both firms and financial professionals while elevating the level of protection afforded to investors. 

CM: Are advisors compliant with Reg BI also compliant with the DOL’s fiduciary rule? 

Gok: There is a good bit of overlap between Reg BI and the DOL rule, but compliance with Reg BI does not meet all the requirements. There are several differences, including:  

• Reg BI applies only to recommendations to purchase securities or engage in investment strategies involving securities, whereas the DOL rule includes all investment products, including insurance, fixed annuities and other assets. 
• The DOL rule and associated prohibited transaction exemptions (PTEs) require an adviser to acknowledge fiduciary status in connection with most recommendations, whereas Reg BI does not incorporate the concept of fiduciary duty. 
• Compliance with the DOL rule requires an annual retrospective review by the firm and sign-off by one of its senior officers. Reg BI does not include a similar provision. 

CM: Financial advisory firms are facing increased scrutiny around Reg BI as more brokers and their firms see enforcement actions and large fines. What can advisors do better in establishing policies and procedures to satisfy FINRA and the SEC’s disclosure requirements? 

Gok: Firms must demonstrate that their systems are sufficient to meet the requirements of Reg BI. These include the delivery of Form CRS and other disclosure materials, enhanced processes to identify and manage conflicts of interest and documentation showing that the advisor considered reasonably available alternatives before making investment recommendations. 

Cetera has automated this procedure through use of a vendor. An electronic system that archives the information used by Cetera is compliant and easy for financial advisors to use. 

CM: Do you agree with critics of Reg BI and fiduciary advocates who have maintained that the rule’s use of the term ‘best interest’ could mislead clients, and that the SEC and FINRA need to clarify that brokers’ product recommendations are different from best interest fiduciary advice? 

Gok: This criticism is misplaced. Reg BI does not include a fiduciary obligation such as that in the Investment Advisers Act, but the SEC has stated that its intent was to create a standard that was substantially equivalent except for the temporal element of an ongoing duty under the Investment Advisers Act. Aside from that, the differences between the best interest and fiduciary standards are largely technical and semantic. 

CM: Does Reg BI go far enough? 

Gok: It does. Reg BI creates an obligation to act in the best interest of the client by meeting the care, conflict and disclosure standards. These elements are the most important in protecting investors, and the other standards that have been proposed, including a fiduciary standard like that in the Investment Advisers Act, would have material negative impacts on investor choice. Reg BI represents the best balancing of the relevant factors. 

CM: As a compliance expert, do you anticipate an expansion in both the number and scope of Reg BI cases? 

Gok: Yes. The SEC and FINRA have both stated that the new obligations in Reg BI will receive a larger focus in examinations, which is likely to result in more enforcement actions. To date, there have been relatively few cases based on Reg BI that could not have been brought under the prior suitability standard. Standards for compliance with the new obligations in Reg BI are being defined in examinations and guidance from the SEC and FINRA and will very likely result in additional enforcement actions in the next few years.