Why Form CRS was the easy part of Regulation Best Interest

The week

On June 30, 2020, the duty a US broker owes a retail customer changed. Until that summer, when a broker suggested moving a retirement account or buying a particular bond fund, across a desk or, more likely by then, across a video call, the broker’s legal duty in that moment was narrower than many customers assumed.

The change had been a decade in the making. The Dodd-Frank Act of 2010 asked the Securities and Exchange Commission to study the standards that brokers and investment advisers owe their clients. The Department of Labor went its own way with a fiduciary rule for retirement advice, which a federal appeals court struck down in 2018. The SEC proposed its own package that spring and adopted it in June 2019.

June 30, 2020 was the compliance date for that package: Regulation Best Interest and Form CRS. A broker-dealer is a firm that buys and sells securities for customers and recommends investments to them, such as the brokerage arm of a bank or a wealth management firm. Regulation Best Interest, often shortened to Reg BI, requires broker-dealers, when they recommend securities transactions or investment strategies to retail customers, to act in the customer’s best interest at the time of the recommendation. The advice has to serve the customer rather than whatever pays the firm or the broker most.

The rule works through four obligations. A disclosure obligation means telling customers the important facts about the relationship. A care obligation means doing real homework before recommending anything, including explicitly considering cost. A conflict of interest obligation means finding and dealing with the incentives that could tilt advice. A compliance obligation means having policies and procedures that make the other three happen.

The rule’s reach was wider than single trades. The SEC’s adopting release said it covered recommendations of account types, including rollovers from workplace retirement plans. It also covered implicit recommendations to hold an investment where the firm had agreed to monitor the account. Recommendations that never became a trade were still recommendations.

Form CRS, the client relationship summary, is the companion piece. It requires both broker-dealers and SEC-registered investment advisers serving retail investors to give them a short, plain-language summary of services, fees, conflicts, the standard of conduct and disciplinary history. It works like a nutrition label on a financial relationship: a few pages, standard headings and suggested questions, written so an ordinary person can compare one firm with another. Firms had to file it with the regulators by June 30 and get it to existing retail customers within the following month.

Filing ran through the regulators’ existing systems. Broker-dealers filed their summaries through FINRA’s Central Registration Depository, and investment advisers filed theirs as a new part of Form ADV. The SEC made the summaries searchable on its investor website. For the first time, a retail investor could set two firms’ standard summaries side by side.

Behind the filings sat a large amount of internal work, most of it done remotely. Firms had to retrain representatives, rebuild account-opening packets, rewrite supervisory procedures and change the screens representatives used. Much of that work could be finished by June 30. The systems that would produce evidence of compliance over the following years were a longer project.

The days around the deadline were crowded. On June 26, a federal appeals court in New York rejected a challenge to the rule brought by a group of states and an association of investment advisers, leaving the rule in place. On June 29, the Department of Labor proposed a new exemption for investment advice to retirement savers, designed to work alongside the SEC’s standard. FINRA, the self-regulatory organization that examines broker-dealers, had already amended its suitability rule so that it would no longer apply to recommendations covered by Reg BI. Massachusetts had adopted its own fiduciary conduct standard for broker-dealers earlier in the year.

The timing was awkward. The pandemic had sent most staff home, and many firms asked for more time. In April, the SEC chairman said the compliance date would hold, while indicating that early examinations would focus on firms’ good-faith efforts to comply. Firms that had planned well crossed the line in reasonable shape. Others discovered that writing a disclosure document was one thing, and proving that every recommendation met a new standard was quite another.

Regulation Best Interest is usually discussed as a conduct standard, a rule about how brokers should behave. For technology and compliance leaders at broker-dealers, it was also a data standard. Promising to act in customers’ best interest was not enough; a firm had to be able to show it, one recommendation at a time and across thousands of recommendations at once. That showing depends on records, and records depend on systems.

Compliance rested on three things, each with its own systems: what clients are told and when, what the firm records about each recommendation, and what the firm monitors across all recommendations. Form CRS belongs to the first, and it was the most contained piece of work. The second and third determined whether clients actually received better recommendations, and they were where firms struggled.

Before those three, a short section on the business and the systems behind it explains why the work was hard. After them come what the records are worth, how firms fared, and a set of tests a board can use.

How brokers get paid, and the systems behind the promise

Start with the business. A broker-dealer earns money in several ways: commissions on trades, fees embedded in products, payments from fund companies, and margins on products it sells from its own inventory. Nothing about that is wrong in itself. The risk is that some products pay the firm or the representative more than others, and that difference can shape what customers are told to buy. Regulation Best Interest does not ban those differences. It requires firms to disclose them, to make recommendations that put the customer first anyway, and to control the incentives that could pull the other way.

Three kinds of system support that promise. The first is document management and delivery: software that stores each version of a disclosure, sends it to the right client at the right time, and keeps a record that it was sent. The second is the recommendation workflow: the screens a representative uses to place an order, open an account or recommend a strategy, together with the customer relationship management system, or CRM, which is the database of who each client is and what has been discussed with them. The third is surveillance and analytics: the reports that look across all activity for patterns a supervisor should investigate.

In many firms these three were built at different times, by different teams, for different purposes. The delivery system was designed for mailing statements. The order screens were designed for speed. The commission platform was designed to pay people accurately. Reg BI asked them to work together to tell one story: this client, with this profile, was told these things, was recommended this product for these reasons, by a representative whose pay looked like this. That is why the rule was as much a data project as a legal one.

The rule also changed the recordkeeping rules underneath. The SEC added a requirement to Exchange Act Rule 17a-3. Broker-dealers must keep a record of all information collected from and provided to each retail customer under Reg BI, and of the person responsible for the account. That made the customer file itself a regulated record, not a convenience for the sales team.

Who the rule reaches, and who it does not

Precision about scope matters, because the systems work follows it. Reg BI applies to broker-dealers and their associated persons when they recommend securities or strategies to a retail customer. A retail customer is a natural person, or a person’s legal representative, receiving the recommendation primarily for personal, family or household purposes. Institutional accounts fall outside it.

Investment advisers are not covered by Reg BI. They owe a fiduciary duty under the Investment Advisers Act, which the SEC described in an interpretation adopted alongside Reg BI. They do have to deliver Form CRS. Dual registrants, firms registered as both, face both regimes. The same representative may act under one standard on Monday and another on Tuesday.

Banks and credit unions mostly meet the rule through someone else. A bank’s retail brokerage is typically an affiliated broker-dealer or a third-party one working under a networking arrangement in the branch. A credit union’s investment program usually works the same way. Reg BI then binds the broker-dealer and its representatives, not the bank or credit union itself. The institution still shares the reputational risk, and its own systems often hold the member or customer data the broker-dealer needs.

Insurance products split along the securities line. Variable annuities are securities, so a broker-dealer recommending one is within Reg BI. Fixed and fixed indexed annuities are insurance products regulated by the states. Many states moved toward a best-interest standard for annuity sales after the National Association of Insurance Commissioners revised its model regulation in early 2020. A firm selling both may need two workflows that look alike and answer to different regulators.

Recommendations that never become trades

Most broker-dealer systems were organized around executed transactions. A trade creates a ticket, a confirmation, a commission and a surveillance record. Reg BI reached further. A recommendation to open one type of account rather than another is covered. So is a recommendation to roll over a retirement plan. Where a firm has agreed to monitor an account, a decision to hold is covered too.

None of those produce a trade ticket at the moment they happen. A recommendation the client declines produces nothing at all in a trade-based system. If the firm wants to supervise them, it has to create a record somewhere else, usually in the CRM or a dedicated workflow. That requirement turned a sales tool into part of the compliance record, and many CRMs were not built for that.

What clients are told, and when

Form CRS had to reach new retail clients at or before the start of the relationship, existing clients at set points and events, and the firm’s website if it had one. It also had to be updated within set periods after material changes, with the changes communicated to existing clients. That is a document management and delivery problem, and it is solvable.

The form itself was tightly specified. The paper version is limited to two pages for a firm offering one type of service, or four for a dual registrant. It follows prescribed headings in a fixed order. It includes conversation starters, suggested questions a client can ask the representative. It must say whether the firm or its professionals have legal or disciplinary history and point readers to the SEC’s free search tool. Those constraints make the drafting hard and the document comparable.

A sound setup tracks which version each client received, when and through which channel. It triggers delivery automatically at required events, such as opening a new account type or a recommendation to roll over retirement assets. A rollover, for readers outside the industry, is moving money out of a workplace retirement plan, such as a 401(k), into an individual account the firm manages. It is often one of the largest financial decisions a client makes, which is why the rules pay it special attention.

Electronic delivery records must show that the client actually had access. With most staff remote and meetings online in the summer of 2020, electronic delivery was now the main channel, which put weight on clean consent records and reliable tracking. A consent record is simply proof that the client agreed to receive documents electronically. If that proof is missing or inconsistent, an emailed disclosure may not count as delivered, and the firm cannot easily show otherwise.

Suppose a regional broker-dealer sends Form CRS by email to every client on June 30. Six months later an examiner asks for evidence that a particular client, who opened a new advisory account in October, received the summary before that account opened. If the delivery system only logged the mass mailing in June, and the account-opening workflow never triggered a fresh delivery, the firm has a gap. Nobody acted in bad faith. The systems simply were not connected to the events the rule cared about.

Amendments are a workflow too

Form CRS is a living document. When something material changes, such as fees, services or disciplinary history, the firm must update it within a set period and then tell existing retail clients about the change within a further period. That is a second delivery campaign, with its own records. A firm that changes its fee schedule twice a year runs that process twice a year.

The practical design is a version register. Each version has an effective date, a summary of what changed, and a link to every delivery made under it. The register answers the examiner’s first question in seconds. Without it, a firm reconstructs history from email logs and mail-house invoices.

Form CRS is one disclosure among several

Form CRS is a summary. The disclosure obligation under Reg BI asks for more: full and fair written disclosure of material facts about capacity, fees, the type and scope of services, and conflicts. Many firms met it with a longer brochure or disclosure document, layered beneath the summary.

That layering creates a delivery trap. Posting the longer document on a website, or linking to it from Form CRS, is easy. Whether that counts as delivering it in writing is a separate question, and examiners later said that a reference alone does not. The delivery system needs to track the full disclosure package as well as the two-page summary.

Names, titles and capacity

The disclosure rules carried a data cleanup job few people expected. Some firms are broker-dealers only, with no investment adviser registration. If such a firm or its representatives call themselves an “adviser” or “advisor,” they are presumed to violate the capacity disclosure requirement. Titles live in many places: business cards, email signatures, the firm’s website, CRM profiles, client letters and social media profiles. Each had to be found and fixed.

For dual registrants, the harder problem was telling clients in which capacity a representative was acting at a given moment. That information has to exist somewhere a supervisor can see it. A recommendation record that does not say whether it was made as a broker or as an adviser cannot be tested against the right standard.

Plain language was its own design task. Firms with several business lines had to explain complex fees and conflicts briefly enough to fit. Testing drafts with real clients, alongside review by counsel, produced documents clients could use to ask better questions. That pairing matters: lawyers make sure a document is accurate and complete, but only readers can tell you whether it is understood.

Dual registrants faced an extra design choice. Firms registered as both broker-dealer and investment adviser could file one combined relationship summary or separate ones. A combined document helped clients compare the two kinds of account side by side. It also had to explain, within tight limits, why the same representative might be held to different standards depending on the account. Many firms found that explaining this clearly forced internal clarity about which recommendations were made in which capacity, a question that mattered again for the care obligation.

What the firm records about each recommendation

The care obligation requires reasonable diligence, care and skill in making a recommendation. The broker must understand the investment’s risks, rewards and costs, and the customer’s investment profile. The investment profile is the picture of the client: age, income, other investments, goals, how long they plan to invest, how much risk they can stomach, and how much cash they may need. The rule does not prescribe documentation for every recommendation. A firm must still be able to show how it met the obligation, especially for complex or risky products, account type recommendations and rollovers.

That needs information many firms did not capture systematically: the customer profile at the time of the recommendation, the reasonably available alternatives considered, and the reason for the choice. Many recommendation records showed the product and little else. Without the profile, the alternatives and the reason, nobody can reconstruct the reasoning if something goes wrong.

Making “reasonably available alternatives” concrete

The phrase is easy to write into a policy and hard to operate. A firm has to decide what the set of alternatives is for each kind of recommendation. For a fund purchase, it might be funds in the same category on the firm’s platform, including lower-cost options. For an account recommendation, it is the account types the firm offers. For a rollover, it includes leaving the money where it is.

Comparing share classes of one fund is a narrow test. SEC staff later said that it is generally not enough on its own, and that the comparison should start with other investments that could meet the same objective. Cost must be considered every time, including indirect costs such as sales loads, ongoing fees, trading and exit costs. Cost is not the only factor, and the cheapest option is not automatically the right one.

Systems make the abstraction usable. A comparison tool inside the order screen can show the representative two or three alternatives with their total cost over the client’s time horizon. The tool helps only if its use is required for the categories where it matters, and if the firm keeps a record that it was used. A tool that representatives may skip, with no trace either way, cannot support a supervisory finding in either direction.

Structured fields, calibrated by risk

Free-text notes make supervision slow and inconsistent. One representative writes a paragraph, another writes “client agreed,” and a supervisor reviewing hundreds of trades cannot compare them. Structured fields within the order or recommendation workflow make it far easier. A structured field is a box with defined choices or formats, such as a drop-down list of alternatives considered, rather than an open text box. Because the answers are consistent, they can be searched, counted and compared.

Structured fields add steps for representatives, so the design should collect only what matters. A short set of required fields for high-risk categories, and lighter capture for routine trades, balances the burden. A representative buying a widely held index fund for a long-standing client should not face the same form as one recommending a complex product to a retiree. Getting that calibration right is a joint job for compliance, the business and the people who design the screens.

The high-risk categories are fairly predictable. They include rollovers and account-type changes, complex products, products that use borrowing or derivatives to magnify returns, illiquid investments such as private placements, concentrated positions, and recommendations that look inconsistent with the client’s stated objective. A firm can name its list, publish it to representatives, and wire the workflow to require more for those cases and less for everything else.

Where the record lives matters as much as what it says. Notes held in a branch office’s files, or on a representative’s laptop, can only be reviewed when someone visits. Central capture means a supervisor can review a recommendation within days rather than at the next branch inspection.

Profile data that stays current

Profile data decays. A customer’s income, objectives and risk tolerance change, and a recommendation based on a stale profile is hard to defend. Prompting representatives to confirm key profile fields before high-risk recommendations, and recording that confirmation, keeps the basis current. In practice this can be a simple screen: “Last confirmed 26 months ago. Confirm or update income, objective and risk tolerance before proceeding.” The value lies less in the screen than in the record it leaves behind.

Profile changes need their own scrutiny. A risk tolerance that moves from moderate to aggressive the day before a speculative purchase is a pattern supervisors should see. Keeping every version of the profile, with who changed it and when, allows that check. Overwriting the old value destroys the evidence.

Rollovers across two regulators

Rollover recommendations need particular care, because the comparison between the plan the client leaves and the account they join depends on fee and service data that the firm must gather from outside its own systems. The firm knows its own fees. It may not know the fees and services of the client’s employer plan unless it asks for them and records them. A defensible rollover file shows that comparison was actually made, with the numbers that informed it.

The data does exist. Plan administrators must give participants regular fee disclosures under Labor Department rules, so a client can usually supply one. Where the client cannot, firms use public plan filings or reasonable estimates, and should record which they used. A rollover file that says “plan fees unknown” invites the question of how the comparison was made.

Rollovers out of workplace plans also fall under the Labor Department’s rules for retirement advice. A broker-dealer recommending one may need to satisfy both the SEC standard and the conditions of a Labor Department exemption. The two overlap but are not identical, and counsel should map them for each firm. A single rollover workflow that captures what both require is cheaper than two.

What the firm monitors across recommendations

The conflict of interest obligation requires policies to identify and address conflicts. Among other things, firms must eliminate sales contests, quotas, bonuses and non-cash compensation based on sales of specific securities within limited periods. Those are the incentives most likely to push a representative toward a particular product in a particular month, whatever the client needs.

The rule also goes further than disclosure. Conflicts that create an incentive for a representative to put their interests first must be mitigated, meaning the firm changes practices to reduce them. Firms that offer only proprietary products or a limited menu must identify and address the conflicts that limitation creates. Telling the client about a conflict is necessary; for these conflicts it is not sufficient.

Monitoring conflicts means joining compensation, product and recommendation data to detect patterns. Examples include a representative favoring higher-cost share classes, or concentrating clients in products with higher payouts. A share class, briefly, is a version of the same fund sold with a different fee structure; one class might charge more upfront, another more each year. Two clients can own the same fund and pay very different amounts.

Those datasets usually live in different systems. Compensation sits in commission platforms, product attributes in a product master, and recommendations in order management and CRM. A product master is the firm’s reference list of every product it offers and its features: cost, risk rating, payout to the firm. Order management is the system that records and routes trades. Joining them is a data engineering task, and it is the only way to supervise conflicts at scale rather than by sampling a few accounts each quarter.

What the joined data looks like

The join needs a few common keys. Each representative has a registration number that appears in licensing, commission and order systems. Each product has a standard identifier and a share class. Each account has an identifier that ties it to a client profile. With those keys, every recommendation can carry its client profile at that moment, its product’s cost and risk attributes, and the payout it generated for the firm and the representative.

The hard parts are history and change. Payout grids change during the year. Product risk ratings get revised. Profiles get updated. A monitoring dataset must record what each value was when the recommendation was made, not what it is today. Otherwise the analysis compares a 2020 recommendation with 2021 facts and reaches the wrong conclusion.

Sales records alone show what sold. Commission records alone show what people earned. Only joined together do they show whether the pattern of sales tracks the pattern of pay, in a brokerage as in any shop that pays its staff by commission.

Exception reports that supervisors can use

Exception reports should compare each representative’s product mix and costs with peers serving similar clients. An exception report is a list of the cases that fall outside the norm, so a supervisor looks at the unusual rather than at everything. The comparison with peers matters: a representative serving mostly retirees will have a different mix from one serving young professionals, so a fair test compares like with like. Alerts should go to supervisors with a deadline for review and a record of the outcome. An alert nobody reviews, or reviews without leaving a trace, protects nobody.

Surveillance built before 2020 needs a fresh look. Pattern tests designed for suitability and churning may miss the new categories, such as account-type recommendations and holds in monitored accounts. A system that only sees executed trades cannot see a declined recommendation at all. Each existing alert should be mapped to the Reg BI obligation it tests, and the gaps filled.

Monitoring also tests the firm’s own design choices. If a product shelf or payout grid creates incentives that the data shows influencing recommendations, the fix may lie in the grid, not in supervising individual brokers. A payout grid is the schedule that sets how much of the revenue from each sale a representative keeps. If the grid pays noticeably more for one product family, the firm has built a conflict into its own pay plan. Compliance teams that bring that analysis to product and compensation committees turn monitoring into prevention.

The objection that suitability already covered this

A fair objection is that brokers already had a suitability obligation under FINRA’s rules, and firms already ran surveillance. On that view, Reg BI renamed existing duties and the data work was overdone.

The overlap is real, but the differences are the ones that need data. Cost became an explicit factor in every recommendation. Account-type recommendations and implicit holds came within scope. Certain sales incentives had to be eliminated, and representative-level conflicts mitigated rather than only disclosed. Each of those requires evidence that a suitability program built around trades did not routinely collect. Firms that treated Reg BI as suitability with a new label were the ones later told their policies were generic.

A second objection is that the documentation burden falls on clients in the end, through higher costs and slower service. Some of that is true. A rollover file with real fee comparisons takes longer to assemble than a signature. The answer is proportion. The extra minutes belong on the decisions where a client can lose the most, such as moving a lifetime of retirement savings, and nowhere else. A firm that spreads the burden evenly across every trade gets the worst of both: slower service and no better evidence where it counts.

What the records are worth beyond the examiner

These records are worth far beyond what a cost of doing business suggests. The same data that lets a firm defend a recommendation to an examiner tells leadership where the business is healthy and where it is fragile.

The financial case is straightforward. Remediation after an examination finding usually means looking back through months or years of activity, contacting clients and sometimes paying restitution. If the records were never captured, that review becomes slow, expensive and uncertain, because the firm has to reconstruct reasoning that was never written down. Capturing a few structured fields at the time costs far less than rebuilding the story later.

The reputational case is sharper. Clients who rolled over retirement savings, or bought products they later learned were costly, do not distinguish between a documentation gap and bad advice. Neither, often, do journalists. A firm that can show its reasoning is in a different position from one that can only assert it.

The people case is easy to miss. Representatives who are given clear workflows, sensible prompts and fair pay plans spend less time worrying about whether they will be second-guessed. Supervisors with focused exception reports spend their time on the cases that need judgment. Done well, the data investment reduces friction for good advisers and concentrates attention on genuine risk.

What an examiner asks for first

The value of the records shows most plainly in an examination request. Examiners typically start with lists. They ask for the retail accounts opened in a period and the Form CRS delivery records for each. They ask for the rollovers and account-type recommendations made, with the supporting files. They ask for the firm’s inventory of conflicts, its compensation grids and any changes to them, and the exception reports supervisors reviewed, with outcomes. Then they pick samples and test them.

Each of those requests is a query against the firm’s systems. A firm with the data joined can answer in days and choose how to present it. A firm without it assembles spreadsheets by hand from several departments, under a deadline, and often discovers gaps while doing so. The examiners notice the difference in the response itself, before they read a single file.

The same queries serve internal audit. A firm can run the examiner’s likely requests against itself each year and fix what it finds. That turns a stressful event into a routine one, and it gives the board evidence that does not depend on anyone’s assurance.

How the work differs by type of firm

The same rule landed very differently depending on how a firm is built. A large integrated firm owns its order system, CRM and commission platform, so the join is an internal project, however large. An independent broker-dealer whose representatives run their own practices may have dozens of CRMs and note-taking habits across its network. Its first task is to get recommendation records into one place at all.

A small introducing broker-dealer relies on a clearing firm for trade records and often for statements and delivery. Much of the data it needs sits with that partner, and the contract decides how easily it can be extracted. A bank-affiliated or credit-union program adds another layer: the customer relationship lives in the bank’s systems, the brokerage relationship in the broker-dealer’s, and the profile data needs to agree across both.

Smaller firms have a real cost problem. Building comparison tools and joined datasets is expensive, and vendors sell much of it as packages. A small firm can still meet the standard by narrowing what it offers, requiring documentation for a short list of high-risk cases, and reviewing those cases centrally. Calibration matters more for a small firm, not less.

Where firms got it right, and where they slipped

The firms in better shape shared a pattern. Form CRS delivery is driven by events in the client’s life with the firm, not by a calendar mailing. Each recommendation in a high-risk category carries a short, structured record of the profile, the alternatives considered and the reason for the choice. Profile data is confirmed before it is relied on. Compensation, product and recommendation data are joined in one place, and supervisors work from peer-based exception reports with deadlines and recorded outcomes. Findings flow upward to the committees that design products and pay.

The slips were just as recognizable:

• Treating Form CRS as the finish line. The document was visible and had a deadline, so it attracted attention. The harder work on care and conflicts was less visible and easier to defer.
• Relying on free text. Notes fields feel flexible, but they cannot be searched, compared or supervised at scale.
• Capturing everything everywhere. Heavy forms on routine trades breed workarounds and box-ticking. Calibrate by risk.
• Sampling instead of joining. Reviewing a handful of accounts each quarter cannot detect a pattern that only appears across thousands.
• Supervising people while ignoring the pay plan. If the grid creates the incentive, warning individual brokers treats the symptom.
• Building tools without requiring them. A cost comparison that representatives may skip, with no record of use, proves nothing either way.

The trade-offs of the obvious responses

Some responses to the rule carried their own risks. One was to move clients from commission accounts to fee-based advisory accounts, where the adviser’s fiduciary duty applies. For a client who trades rarely, an annual fee can cost more than occasional commissions. The account-type recommendation is itself covered by Reg BI, so the move needs its own analysis and record.

Another was to shrink the product shelf. Removing complex or high-payout products reduces conflict and supervision burden. It also narrows what clients can buy, and a firm with a limited menu still has to address the conflicts that limitation creates. A third was to load representatives with acknowledgments and checkboxes. That produces paper but can bury the few fields that matter under many that do not.

Counsel should confirm what the rule requires of each firm, but the data investment is what turns compliance into better outcomes for clients.

Form CRS delivery, rollover files and joined data show whether a firm is ready

A board member or chief executive does not need to understand the database design to test whether the firm is ready. These questions get to the substance quickly:

1. For any client, can we show which version of Form CRS they received, when and how, within a day of being asked, and which events automatically trigger a new delivery?
2. For a rollover we recommended last month, can we produce the comparison with the client’s old plan, including the fee data we gathered?
3. Which recommendations require structured fields for alternatives and reasons, and what happens on screen when a representative’s profile data is stale?
4. Are compensation, product and recommendation data joined in one place, or are we still sampling?
5. How many supervisory alerts were closed on time last quarter, and when did the product or compensation committee last change something because of what conflict monitoring showed?

If the answers are vague, the gap is rarely in the policy manual. It is in the records the systems do or do not keep. Those systems are where the board’s attention and budget should go.

The same tests suit a bank or credit union that offers brokerage through a partner. Its board can ask the broker-dealer for the answers, and its contract should give it the right to receive them. The institution’s name is on the branch door, whichever entity made the recommendation.

With hindsight

The SEC’s examination program moved in stages. Initial examinations after June 2020 focused on whether firms had written policies and had made reasonable progress in putting them into effect. In December 2020, SEC staff said later examinations would test the specific requirements of the rule, including transaction testing. Reg BI then stayed among the division’s stated examination priorities for broker-dealers in the years that followed.

In January 2023, the division published a risk alert on what those examinations had found. Many policies were generic. Some told representatives to consider reasonably available alternatives or costs without saying how. Some firms had built tools for comparing alternatives but did not require their use, or could not tell whether representatives had used them. Some kept recommendation documentation locally, so it could only be reviewed during branch inspections.

The alert also described surveillance gaps. Some firms relied on systems built before the rule without checking whether they covered rollovers, account recommendations and holds in monitored accounts. Some relied on systems that captured only executed transactions, so recommendations the client declined, and hold recommendations, were invisible. On conflicts, some firms relied on disclosure where the rule required mitigation. On disclosure, some had only posted documents on a website, and some had not ensured that dual-hatted representatives disclosed the capacity in which they were acting.

Read against the article’s three parts, the pattern is plain. The disclosure findings were real but fixable. The care and monitoring findings went to how recommendation data was captured, stored and supervised, which is what the summer of 2020 had asked firms to build.

SEC staff also published a series of bulletins. One on account recommendations, including rollovers, came in March 2022. One on conflicts of interest followed later in 2022. One on the care obligation came in April 2023. It said that comparing share classes of a single fund is generally not enough. Cost must always be considered but is not the only factor, and complex or risky products call for heightened scrutiny. It also said that while Reg BI does not strictly require documentation, it may be difficult to show compliance without it.

The SEC filed its first enforcement action under Regulation Best Interest in June 2022. It charged a broker-dealer and five of its representatives over sales of high-risk, unrated bonds issued by GWG Holdings. The sales ran from July 2020 to April 2021, and many of the customers were retirees or people on fixed incomes. The complaint alleged failures under both the care obligation and the compliance obligation. FINRA, for its part, folded Reg BI into its routine examinations and enforcement.

Form CRS also drew scrutiny, with examiners finding inaccurate or incomplete summaries and gaps in delivery, but those findings were usually fixable by editing a document. The care and conflict findings were not, because they turned on records of individual recommendations that firms either had captured at the time or could not recreate.

The rule outside the SEC moved less cleanly. The Labor Department finalized its exemption for retirement investment advice in December 2020, with conditions that included documenting the reasons a rollover was in the investor’s best interest. Its broader Retirement Security Rule, finalized in April 2024, was stayed by federal courts in Texas that July. In Massachusetts, the state’s highest court upheld the state’s fiduciary rule for broker-dealers in 2024, in a case brought by Robinhood. Firms operating nationally ended up with several overlapping standards, which made a single, well-structured recommendation record more valuable, not less.

That asymmetry is the heart of the story. A disclosure document can be corrected next week. A record of why a broker recommended a product to a client two years ago either exists or it does not. No amount of later effort can create contemporaneous evidence, the kind written down when the decision was made. Firms that treated the summer of 2020 as the moment to change their workflows had something to show examiners. Firms that treated it as a document deadline were left explaining.

Other regulated industries show the same pattern. Whenever a new rule asks an organization to show that its judgments were sound, the visible deliverable, the form or the notice, will attract the attention because it has a deadline. The harder and more valuable work is building the systems that capture evidence as decisions are made.