Now that the Regulation Best Interest (Reg BI) and Form CRS disclosure requirement have been on the books for a few months, the Securities and Exchange Commission (SEC) held a roundtable on October 26, 2020 to discuss issues and observations on firm compliance with the rules.

The SEC and the Financial Industry Regulatory Authority (FINRA) indicated that firms appear to be on the right track, but also offered requirement reminders and observations of industry practices to aid firms in meeting regulatory expectations. Around the rules’ implementation, the SEC’s Office of Compliance Inspections and Examinations and FINRA have been conducting exams to understand and assess how firms are complying with the rules.

During the roundtable discussion, officials identified key points that registrants should consider as they continue to enhance and implement procedures, controls, and training to aid in compliance with Reg BI and Form CRS.

Regulation BI

Reg BI requires a broker-dealer to act in the best interest of its retail customer at the time it makes a recommendation to a retail customer. SEC staff noted that the closer a communication is to a call to action, the more likely it is a recommendation. As part of this requirement, broker-dealers must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation BI (compliance obligation) in addition to meeting conflict of interest, care, and disclosure obligations.

The SEC roundtable discussion included the following key take-aways and industry practices implemented by broker-dealers to aid in meeting these obligations.

Policies and procedures should:

  • Be tailored to firm’s size, business model, clients, and risks associated with the firm

  • Provide guidance as to how a financial professional is to comply with the obligations and not just state the rules

  • Give guidance as to how to identify reasonably available alternatives to an investment

  • Be fully implemented and contain sufficient detail

  • Address recordkeeping requirements, including testing to ensure adherence

  • Be regularly and periodically tested to ensure that the policies and procedures are working as intended

  • Distinguish between FINRA Rule 2111 (Suitability Obligation) and Reg BI

Training should:

  • Be administered timely and completed by employees, as well as be documented and tracked to completion

Examples of how broker-dealers are addressing the Care, Conflict of Interest, and Disclosure obligations:

  • Developing internal systems to compare investment choices and documenting the basis of a recommendation in these internal systems

  • Developing questionnaires and risk scores for clients and products

  • Creating detailed inventories of conflicts of interest and associated/related mitigation

  • Assessing high-risk products related to maintaining them as offered products

  • Reviewing annually registered representative compensation arrangements to identify conflicts of interest

  • Conducting periodic reviews to identify opportunities to mitigate or eliminate incentives for financial professionals to place their interests above those of the customers

  • Implementing processes to help financial professionals make reasonable alternative investment recommendations

  • Implementing technology solutions to record and track disclosure deliveries

  • Using plain language in disclosures

 Form CRS

Form CRS is a relationship summary disclosure form (“CRS” stands for customer or client relationship summary). Broker-dealers and financial advisors are now required to provide a brief relationship summary to retail investors. The relationship summary is intended to inform retail investors about: the types of client and customer relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the firm and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the firm.

The SEC and FINRA staff shared the following tips, which serve as reminders to firms as they review and enhance their Form CRS to ensure compliance.

  • Form CRS must be created using a text searchable format with readable headings and there must be a means for creating access to information posted on-line

  • Relationship summaries should be comprehensive and not omit required disclosures

  • Reading level of documents should be at 8th grade

  • Required references should be included in relationship summaries

  • Disclosures should be concise and factual

  • Affiliate relationships should be effectively articulated and described

  • Descriptions of relationships and services should be succinct

  • Description of fees and costs should allow investors to understand the nature of fees and costs

  • Form CRS instructions for documents should be followed

  • Conflicts of interest created by compensation arrangements must be disclosed

  • Firms must answer yes or no to the disciplinary history item on Form CRS

The following links provide relevant SEC and FINRA guidance to aid firms in meeting Reg BI and Form CRS obligations. In light of SEC and FINRA’s continued examinations of firms to assess compliance with Reg BI and Form CRS, we expect that the SEC and FINRA will continue to update FAQs to aid firms in meeting their regulatory obligations.

1)     The Adopting Release for Regulation Best Interest https://www.sec.gov/rules/final/2019/34-86031.pdf

2)     Form CRS Relationship Summary; Amendments to Form ADV https://www.sec.gov/rules/final/2019/34-86032.pdf

3)     Frequently Asked Questions on Regulation Best Interest

https://www.sec.gov/tm/faq-regulation-best-interest

4)     Frequently Asked Questions on Form CRS
https://www.sec.gov/investment/form-crs-faq

5)     Regulation Best Interest: A Small Entity Compliance Guide https://www.sec.gov/info/smallbus/secg/regulation-best-interest

6)     Form CRS Relationship Summary; Amendments to Form ADV:  A Small Entity Compliance Guide

https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary

7)     FINRA Reg BI and Form CRS Firm Checklist https://www.finra.org/sites/default/files/2019-10/reg-bi-checklist.pdf

8)     SEC Risk Alert Examinations that Focus on Compliance with Regulation Best Interest https://www.sec.gov/files/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf

9)     SEC Risk Alert Examinations that Focus on Compliance with Form CRS https://www.sec.gov/files/Risk%20Alert%20-%20Form%20CRS%20Exams.pdf

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