The SEC announced April 7 that initial examinations under its Regulation Best Interest will focus on assessing whether broker-dealers have made a good-faith effort to comply with the regulatory package set to take effect in June.
Two new risk alerts released by the Commission’s Office of Compliance Inspections and Examinations (OCIE) provide broker-dealers and investment advisers with advance information about the expected scope and content of the initial examinations for compliance with Reg BI and Form CRS.
The SEC announced April 2 that it intends to move forward with the regulatory package’s June 30, 2020 compliance date, despite disruptions caused by the COVID-19 pandemic. Chairman Jay Clayton advised in that announcement that the Commission believes the June 30 date “remains appropriate,” given the extensive preparations that have taken place during the past year since the rulemaking was adopted on June 5, 2019.
“Regulation Best Interest and Form CRS are critical to the protection of Main Street investors, and we feel it is important to share our plans for initial examinations to help firms assess their preparedness as the June 30, 2020 compliance date nears,” stated OCIE Director Pete Driscoll. “We understand that this implementation will be an iterative process and our focus will be on firms continuing good faith and reasonable efforts, including taking into account firm-specific effects from disruptions caused by COVID-19.”
The two risk alerts by the OCIE detail some of the specific items that the department will be assessing, including efforts to implement policies and procedures to comply with Reg BI, as well as the filing of a firm’s Form CRS and its process for delivering the summary to new and existing retail investors.
As for disclosure obligations, the nine-page Reg BI alert explains that staff may assess how the firm has met the requirements to disclose material facts relating to the terms of the relationship, including:
- the capacity in which the recommendation is being made;
- material fees and costs that apply to the retail customer’s transactions, holdings and accounts; and
- material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer.
Staff may also review the content and timing of the disclosures and other firm records to determine if the disclosures provide the required information to retail customers.
To assess compliance with the care obligation, staff may review, among other things:
- information collected from retail customers to develop their investment profiles;
- the process for having a reasonable basis to believe that the recommendations are in the best interest of the retail customer; and
- how the broker-dealer makes recommendations related to significant investment decisions, such as rollovers and account recommendations, as well as to more complex products.
The Reg BI alert also explains how staff will review compliance with the conflicts of interest obligation requiring a broker dealer to establish written policies and procedures to address conflicts associated with its recommendations to retail customers.
As for Form CRS, the OCIE staff says it may review, among other things:
- whether the firm has filed its relationship summary, including any amendments, with the Commission and whether the summary is posted on the firm’s website;
- whether it includes all required information and is accurate; and
- the process for delivering the relationship summary to existing and new retail investors.
Staff may also review records of the dates that each relationship summary was provided to validate whether the firm complied with the delivery obligations, including the initial delivery of the summary to existing retail investors by July 30, 2020.
