Regulation Best Interest Underwriting Agreement: An Overview
In June 2019, the Securities and Exchange Commission (SEC) adopted a new regulation known as “Regulation Best Interest” (Reg BI) to enhance the legal fiduciary duties of broker-dealers when offering investment advice to their clients. Reg BI is one of the SEC`s most significant regulations and has been in effect since June 30, 2020.
The regulation applies to broker-dealers that make securities recommendations to retail clients. Reg BI has four content obligations that brokers must fulfill: disclosure, care, conflicts of interest, and compliance. One of the most critical components of Reg BI is the underwriting agreement.
An underwriting agreement is a contract between a corporation and an investment bank in which the bank agrees to purchase shares of the corporation’s securities at a predetermined price. The bank, in turn, sells these securities to investors for a profit. The securities could be either equity or debt securities.
Reg BI requires broker-dealers to comply with an underwriting agreement`s provisions when making recommendations. The underwriting agreement must specify the offering price, underwriting discount, amount of securities to be sold, and any other terms and conditions. Broker-dealers are obligated to ensure that their recommendations align with the underwriting agreements` terms and conditions.
Reg BI also requires broker-dealers to disclose any potential conflicts of interest when recommending securities to clients. The broker must disclose any fees or compensation they receive from the sale of securities. The purpose of disclosure is to ensure that clients have complete transparency about any incentive the broker has to recommend a particular security.
Compliance is another critical component of Reg BI. Broker-dealers must establish and enforce policies that align with the regulation`s four content obligations. The broker-dealer must establish procedures to identify and mitigate conflicts of interest that could influence their recommendations to clients. Additionally, compliance policies must be documented and accessible to all employees.
Reg BI aims to provide additional safeguards for retail clients while maintaining the current structure of the securities market. Broker-dealers must follow specific guidelines when recommending securities to their clients. The underwriting agreement is a central component of Reg BI that broker-dealers must adhere to.
The effects of Reg BI are still being studied, but it appears to be driving more in-depth conversations between brokers and their clients. The regulation is helping to ensure that brokers act in their clients` best interests and that clients are aware of the potential risks and rewards of the securities they invest in.
In conclusion, Reg BI is a comprehensive set of rules that broker-dealers must follow when recommending securities to their clients. The underwriting agreement is a critical component of Reg BI, and brokers must ensure that their recommendations align with the agreement`s terms and conditions. By following Reg BI`s guidelines, broker-dealers can provide their clients with transparent and valuable investment advice.