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Recently, Morningstar reached out to about 100 individualbrokers to gauge their firms' progress in complying with Regulation Best Interest by the July 1compliance date. In January, the Securities and ExchangeCommission said it would not be moving the scheduled July 1compliance date for Reg BI, which is designed to raise thestandard of care to retail investors above FINRA's suitabilitystandard.

About a third of those brokers were unaware, or unsure, of anymeasures their firms had taken relative to product line-ups in therun-up to July.

Related: Reish: Broker-dealers already behind the ball inprepping for Reg BI

With about three-and-a-half months left to go time, differentfirms are taking different paths to compliance, said MattRadgowski, head of advisor solutions at Morningstar.

"We're seeing a flurry of new activity," he said, suggestingindustry may have been collectively sitting on its hands up untilrecently.

Many broker-dealers—even the largest with the most resources—arefirst focusing on complying with Form CRS, companion regulationdesigned to help retail investors pick a financial servicesfirm.

Arguably, complying with Form CRS is an easier lift thancomplying with Reg BI, which will require brokers to be able toprove to regulators—and no doubt attorneys—that theirrecommendations were executed in the best interest of theirclients.

"With any regulation, you have to demonstrate the workflow is incompliance," said Radgowski. "To do that at scale is going torequire technology—which will definitely be a friend tobroker-dealers."

Reasonably available alternatives

The SEC's regulation does not prohibit brokers from recommendingproprietary products. Nor does it say the lowest cost products haveto be recommended to assure a product is sold in an investor's bestinterest.

So if a broker can recommend her firm's proprietary products,even if they are more expensive, how is she to prove her client'sinterests were put before her own?

The answer could be found in Reg BI's Care Obligation—one of thefour component obligations to the overall rule.

In a compliance guide, the SEC said, "You should considerreasonably available alternatives (RAAs), if any, offered by yourbroker-dealer in determining whether you have a reasonable basisfor making the recommendation."

"The RAA is amplified in FINRA's description of what an examquestion may look like," said Radgowski.

The SEC says determining reasonable alternatives will depend onthe "facts and circumstances at the time of therecommendation."

Radgowski interprets that to mean a comparison of performance,cost, and risk – information Morningstar is, of course, inthe business of providing.

Morningstar—and others, notes Radgowski—is in the process ofbuilding new workflows on top of existing capabilities specificallyto satisfy the reasonably available alternatives component of RegBI's Care Obligation.

Among other tools, Morningstar is developing a filter for RRAsthat can be tailored to specific broker-dealer product offerings.The technology will then document the selection process, andgenerate a FINRA review report. The products will be ready by June30, said Radgowski.

How to prove your rollover recommendation satisfies the bestinterest

The SEC's final rule included a critical addition:Recommendations to roll over assets from a 401(k) to an IRA willhave to be in investors' best interest and satisfy Reg BI.

The new requirement comes as thousands of new rollover clientsfeed the market every day with the retirement of baby boomers. Bythe end of 2018, IRAs held $8.8 trillion in assets, growth that haslargely been fueled by rollovers. According to the InvestmentCompany Institute, of 42.6 million IRAs, 57 percent held onlyrollover money.

Even consumer-advocate critics of Reg BI were supportive of theinclusion of rollovers under the regulation. For brokers, thebottom line is that recommending a rollover can't be done withoutdocumented reasoning for doing so.

The question will be how to mitigate regulatory risk inexecuting a rollover, and how to prove the advice was made incustomers' best interest.

"A lot will depend on how the SEC and FINRA choose to enforcethe rule on rollovers," said Radgowski. "But there will be ways tominimize the risk."

Most critically, brokers will need specific information on the401(k) plans in question, specifically the investmentoptions and the all-in cost of staying in the plan. Tech workflowswill be able to put that data at brokers' fingertips. But brokerswill also have to offer, and document, additional services to proverollover costs are justifiable.

"In our eyes, it's really important brokers incorporateadditional interactions that take place outside of the 401(k), andother services specific to the IRA to minimize their risk," addedRadgowski.

Radgowski doesn't expect rollover flows will be staunched underthe rule, but he does expect the care—and work load—behind therecommendations to increase.

"Rollovers will continue, given the holistic planning advisorsand brokers are already taking, but the speed with which they areexecuted will decrease," he added.

Regulators have said that at the outset, their examination focuswill be on the work broker-dealers are doing to comply with Reg BI,more than lowering the hammer where implementation may beinadvertently insufficient.

"It's really important firms demonstrate progress towardcompliance," said Radgowski. "That means a clear plan that includeschanges to work flow, enhancements to work flow, and the ability todocument them."

Waiting, or counting on the largesse or lethargy of regulators,is not a strategy.

"There seems to be an acknowledgement from regulators that aslong as you are demonstrating a plan toward compliance, they willwork with you. But that doesn't mean you can wait," addedRadgowski. "You will want to be as prepared as possible by June30."

READ MORE:

• How SEC Chair Clayton responded to 7 criticisms ofReg BI
• SEC releases FAQ for RIAs amid heightened feedisclosure scrutiny
• Can the SEC and DOL sing inharmony?