I often say that when the market is booming, a lot of people feel like they can handle their own financial planning. But when times get tough, when the market is volatile and a recession is underway, it’s easier for many people to see the value of objective financial guidance. Regulatory changes, underway well before the onset of the pandemic, have also been put in place to govern the relationship between those who seek financial guidance and those who provide such services.

On June 30, 2020, regulations passed by the Securities and Exchange Commission (SEC) were put into effect. Often referred to as "Regulation Best Interest" or "Reg BI," the rules include new disclosure and compliance obligations, as well as establishing a new standard of care for broker-dealers. It also requires a new standard communication — a customer relationship summary called Form CRS. While there are a lot of details surrounding Reg BI and Form CRS, at the foundation of the regulations lies the goal of greater transparency.

As an Investment Adviser Representative (that is, associated with a Registered Investment Adviser, or RIA), I am classified by the SEC as a fiduciary. A fiduciary is legally bound to act on your behalf and serve your interests above their own. This has always been the policy of Mirus Financial Partners and our Independent broker-dealer, Cetera Advisors, the changes in regulations makes it a legal requirement.

In the past, financial professionals associated with broker-dealers were held to a "suitability" standard, or a reasonable basis to believe a recommended transaction or strategy be suitable, given factors that include your investment portfolio, age, experience, risk tolerance, liquidity needs, objectives, and time frames. However, new Regulation Best Interest guidelines impose a requirement that a broker-dealer must have a reasonable basis to believe that recommendation is in the client's best interest, considering a number of different factors.

"Regulation Best Interest" or "Reg BI" - What’s Going to Change?

This does not mean any advice or recommendations you received from Mirus Financial Partners weren't in your best interests. It’s just a new set of standards that now apply in reviewing those recommendations. For example, in the past, other financial professionals might recommend one product over another based on the commission structure. These new rules make it clear that any recommendation or advice you receive from a financial professional must be made with a clear understanding that the client’s needs and interests come first.

Increased Financial Transparency

Reg BI requires broker-dealers to establish, maintain, and enforce written policies and procedures that are reasonably designed to address any conflicts of interest. If those conflicts of interest cannot be eliminated, a financial professional must offer recommendations.

If any recommendations are based on a limited product menu or restricted to proprietary product offerings, that must be disclosed upfront.

Recommending a product with a higher commission payout means that the recommendation is not in your best interest, but these new regulations require that you have the information you need to understand and evaluate the recommendation.  

What You Should Know About Form CRS

The SEC requires Form CRS to be concise — no more than two pages — and written in easily understandable terms. (Firms that are dually registered as a broker-dealer and an investment adviser may choose to send out a four-page Form CRS or separate two-page forms.) Each form will explain whether the firm is a broker-dealer, an RIA, or both; the types of services offered; fees, costs, potential conflicts of interest, and the standard of conduct under which they operate; and whether there is any disciplinary history.

Why Does the Form CRS Matter to the SEC?

In addition to sending you the initial Form CRS, broker-dealers and SEC-registered RIAs will send you a new form if you open a new account, when a rollover from a retirement account is recommended, when new services or products are provided, and when the firm makes material changes to its Form CRS.

When you receive Form CRS, you should take the time to read and understand it. The whole point of the Form CRS requirement is to provide the information you need to help evaluate your relationship with your financial professional and his or her firm. If there is anything you have questions about or do not understand, reach out to your financial professional.

Want More Information from the SEC on Form CRS? 

The SEC has created a website designed to help investors understand how to use Form CRS. The site includes a video introduction by Jay Clayton, chairman of the U.S. Securities and Exchange Commission, and links to educational resources. For more information, visit investor.gov/home/welcome-investor-gov-crs.