Legal Updates SEC Regulation BI and Form CRS Go Into Effect On June 30 - Is Your Firm Ready? By A.J. Bosco | June 22, 2020 Securities and Exchange Commission Regulation Best Interest and its attendant Form CRS (CRS stands for Customer Relationship Summary) go into effect on June 30, 2020, despite COVID-19. Indeed, in April, SEC Chairman Jay Clayton issued a statement expressing his belief that most firms had made enough progress towards implementing Reg BI and Form CRS that no delay was necessary.1 Then, on June 16, Chairman Clayton, in another statement, confirmed the June 30 compliance date.2 In the June 16 statement, Chairman Clayton highlighted his belief that the market volatility caused by the COVID-19 crisis, along with some of the “complex and risky” investments and strategies being marketed to Main Street investors in response to the crisis, might not be in retail investors’ best interest. Therefore, Reg BI is needed more than ever. Reg BI establishes a “best interest” standard of conduct for broker-dealers when conducting business with retail customers. The best interest standard imposes substantially more obligations on the relationship between brokerage firms and their retail customers than the traditional “suitability” standard did. Under Reg BI, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, a broker-dealer must act in the best interest of the retail customer at the time the recommendation is made, without placing its own financial or other interest ahead of the retail customer’s interest. To satisfy this general obligation, broker-dealers must comply with four component obligations: a Disclosure Obligation, a Care Obligation, a Conflict of Interest Obligation, and a Compliance Obligation.3 Form CRS requires firms to provide customers with a summary about the firm designed to help retail investors better understand the nature of the relationship and what services they can expect from the firm. Among other things, the rule imposes delivery and filing, content, formatting and updating obligations. Together Reg BI and Form CRS represent many years of work by the SEC and input from the industry. Both sides have a stake in seeing it implemented smoothly. If your firm has put in the effort to prepare, you do not need to be nervous about what happens after June 30. But with two weeks to go before the “go live” date, what should firms be doing to ensure they are ready to comply? Here are five suggestions. 1. Review (again) what the regulators and industry groups have said about Reg BI The SEC and FINRA have provided the financial community with plenty of communications about implementing and enforcing Reg BI and Form CRS. Most prominently, the SEC Office of Compliance, Inspections and Examinations issued Risk Alerts to provide broker-dealers information about the scope and content of their initial Reg BI4 and Form CRS5 exams. The Alerts review, in detail the obligations imposed by the new rules and how the staff will evaluate firms’ compliance. The Reg BI alert includes a sample list of documents and information OCIE may request when conducting an exam. While the list is not comprehensive and not all documents are relevant to every firm, if, after reviewing it, your firm is missing some of the expected documents, you know you have a gap to fill. In his June 16 statement, Chairman Clayton mentioned four areas where firms may need to use increased care when making recommendations to retail investors. The four areas are (1) rollovers of 401(k) and other plans; (2) complex or risky products, such as leveraged or structured investments; (3) COVID related products, such as investments in companies that claim to de developing a cure for COVID; and (4) special purpose acquisition corporations (SPACs), which are created to raise money from investors for the sponsor of the SPAC to use in the future to identify and acquire another company. If your firm deals in any of these products, it’s time to take a second look at how the firm documents their suitability for retail investors. Similarly, FINRA has posted several useful documents to its website. It issued a report to share “common practices” it observed when it conducted Reg BI preparedness reviews of small, mid-sized and large firms.6 While not advertised as a “best practices” list, it details steps FINRA members took to get ready for Reg BI and Form CRS. FINRA also issued a Reg BI and Form CRS Checklist to help members assess their Reg BI and Form CRS obligations.7 As FINRA stated, the “checklist is not a substitute for” the Rules but does provide firms a detailed, step-by-step guide to preparing for Reg BI and Form CRS. Additionally, SIFMA issued A Firm’s Guide to The Implementation of Regulation Best Interest and the Form CRS Relationship Summary.8 The Guide was designed to help firms satisfy compliance with the regulations. 2. Determine how your firm’s Reg BI preparation stacks up against regulatory guidance Now that you have read the guidance, how does your firm stack-up? If most of what you’ve read is old hat, you are probably on the right track. But reviewing this material may make you realize you’ve skipped a step or haven’t properly updated a policy. Now is the time to make the necessary corrections. 3. Make sure your firm is operationally ready Firms should be ready to implement Reg BI by the deadline. This particularly applies to Form CRS. Firms need to have policies and processes to timely deliver the form to new and existing retail customers that include making and delivering updated forms when needed. Also, form and substance are both important here. An improperly formatted form or forms that are consistently delivered late will give regulators easy findings to include in their exam report. 4. Show your work In his April statement, Chairman Clayton gave the industry one lifeline by telling firms to “continue to make good faith efforts” to comply by June 30 and to “engage with the staff” if they are unable to meet the regulation’s requirements because of COVID-19. When Chairman Clayton said he expects firms to make a good faith effort to comply what did he mean? Evidence that the firm has worked diligently to get ready would be one sign of good faith. Accordingly, expect examiners to ask to review items such as project plans, training materials, new policies and conflict inventories. If you have prepared diligently and have memorialized your preparations, your firm improves its chances of passing regulatory muster even if everything isn’t perfect on June 30. 5. Communicate If you anticipate that due to COVID-19 your firm will not be fully prepared for Reg BI and Form CRS compliance on June 30, consider self-reporting to OCIE or your FINRA Regulatory Coordinator. But Chairman Clayton’s invitation to “engage with the staff” if your firm’s “good faith efforts” to comply were thwarted by COVID-19 is not a free pass. Expect detailed questions from the staff. Be prepared to specify why COVID-19 prevented the firm from being ready. Be set to explain the specific issue and share your written remediation plan that includes a specific resolution date. Reg BI and Form CRS are major initiatives in the Commission’s campaign to protect “Main Street” investors. Regulators are ready and have devoted substantial resources into getting the industry ready. Now is the time to spend the effort to make sure your firm is ready. We are available to consult with you on any questions you may have concerning this alert. 1https://www.sec.gov/news/public-statement/statement-clayton-investors-rbi-form-crs 2https://www.sec.gov/news/public-statement/clayton-compliance-date-regulation-best-interest-form-crs 3 See, Office of Compliance Inspections and Examinations, Risk Alert, Examinations that Focus on Compliance with Regulation Best Interest, https://www.sec.gov/file/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf 4https://www.sec.gov/files/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf 5https://www.sec.gov/files/Risk%20Alert%20-%20Form%20CRS%20Exams.pdf 6https://www.finra.org/rules-guidance/key-topics/regulation-best-interest/preparedness 7https://www.finra.org/sites/default/files/2019-10/reg-bi-checklist.pdf 8https://www.sifma.org/wp-content/uploads/2019/09/SIFMA-Reg-BI-Program-Implementation-Guide.pdf Short bio missing
SEC Regulation BI and Form CRS Go Into Effect On June 30 - Is Your Firm Ready? By A.J. Bosco | June 22, 2020 Securities and Exchange Commission Regulation Best Interest and its attendant Form CRS (CRS stands for Customer Relationship Summary) go into effect on June 30, 2020, despite COVID-19. Indeed, in April, SEC Chairman Jay Clayton issued a statement expressing his belief that most firms had made enough progress towards implementing Reg BI and Form CRS that no delay was necessary.1 Then, on June 16, Chairman Clayton, in another statement, confirmed the June 30 compliance date.2 In the June 16 statement, Chairman Clayton highlighted his belief that the market volatility caused by the COVID-19 crisis, along with some of the “complex and risky” investments and strategies being marketed to Main Street investors in response to the crisis, might not be in retail investors’ best interest. Therefore, Reg BI is needed more than ever. Reg BI establishes a “best interest” standard of conduct for broker-dealers when conducting business with retail customers. The best interest standard imposes substantially more obligations on the relationship between brokerage firms and their retail customers than the traditional “suitability” standard did. Under Reg BI, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, a broker-dealer must act in the best interest of the retail customer at the time the recommendation is made, without placing its own financial or other interest ahead of the retail customer’s interest. To satisfy this general obligation, broker-dealers must comply with four component obligations: a Disclosure Obligation, a Care Obligation, a Conflict of Interest Obligation, and a Compliance Obligation.3 Form CRS requires firms to provide customers with a summary about the firm designed to help retail investors better understand the nature of the relationship and what services they can expect from the firm. Among other things, the rule imposes delivery and filing, content, formatting and updating obligations. Together Reg BI and Form CRS represent many years of work by the SEC and input from the industry. Both sides have a stake in seeing it implemented smoothly. If your firm has put in the effort to prepare, you do not need to be nervous about what happens after June 30. But with two weeks to go before the “go live” date, what should firms be doing to ensure they are ready to comply? Here are five suggestions. 1. Review (again) what the regulators and industry groups have said about Reg BI The SEC and FINRA have provided the financial community with plenty of communications about implementing and enforcing Reg BI and Form CRS. Most prominently, the SEC Office of Compliance, Inspections and Examinations issued Risk Alerts to provide broker-dealers information about the scope and content of their initial Reg BI4 and Form CRS5 exams. The Alerts review, in detail the obligations imposed by the new rules and how the staff will evaluate firms’ compliance. The Reg BI alert includes a sample list of documents and information OCIE may request when conducting an exam. While the list is not comprehensive and not all documents are relevant to every firm, if, after reviewing it, your firm is missing some of the expected documents, you know you have a gap to fill. In his June 16 statement, Chairman Clayton mentioned four areas where firms may need to use increased care when making recommendations to retail investors. The four areas are (1) rollovers of 401(k) and other plans; (2) complex or risky products, such as leveraged or structured investments; (3) COVID related products, such as investments in companies that claim to de developing a cure for COVID; and (4) special purpose acquisition corporations (SPACs), which are created to raise money from investors for the sponsor of the SPAC to use in the future to identify and acquire another company. If your firm deals in any of these products, it’s time to take a second look at how the firm documents their suitability for retail investors. Similarly, FINRA has posted several useful documents to its website. It issued a report to share “common practices” it observed when it conducted Reg BI preparedness reviews of small, mid-sized and large firms.6 While not advertised as a “best practices” list, it details steps FINRA members took to get ready for Reg BI and Form CRS. FINRA also issued a Reg BI and Form CRS Checklist to help members assess their Reg BI and Form CRS obligations.7 As FINRA stated, the “checklist is not a substitute for” the Rules but does provide firms a detailed, step-by-step guide to preparing for Reg BI and Form CRS. Additionally, SIFMA issued A Firm’s Guide to The Implementation of Regulation Best Interest and the Form CRS Relationship Summary.8 The Guide was designed to help firms satisfy compliance with the regulations. 2. Determine how your firm’s Reg BI preparation stacks up against regulatory guidance Now that you have read the guidance, how does your firm stack-up? If most of what you’ve read is old hat, you are probably on the right track. But reviewing this material may make you realize you’ve skipped a step or haven’t properly updated a policy. Now is the time to make the necessary corrections. 3. Make sure your firm is operationally ready Firms should be ready to implement Reg BI by the deadline. This particularly applies to Form CRS. Firms need to have policies and processes to timely deliver the form to new and existing retail customers that include making and delivering updated forms when needed. Also, form and substance are both important here. An improperly formatted form or forms that are consistently delivered late will give regulators easy findings to include in their exam report. 4. Show your work In his April statement, Chairman Clayton gave the industry one lifeline by telling firms to “continue to make good faith efforts” to comply by June 30 and to “engage with the staff” if they are unable to meet the regulation’s requirements because of COVID-19. When Chairman Clayton said he expects firms to make a good faith effort to comply what did he mean? Evidence that the firm has worked diligently to get ready would be one sign of good faith. Accordingly, expect examiners to ask to review items such as project plans, training materials, new policies and conflict inventories. If you have prepared diligently and have memorialized your preparations, your firm improves its chances of passing regulatory muster even if everything isn’t perfect on June 30. 5. Communicate If you anticipate that due to COVID-19 your firm will not be fully prepared for Reg BI and Form CRS compliance on June 30, consider self-reporting to OCIE or your FINRA Regulatory Coordinator. But Chairman Clayton’s invitation to “engage with the staff” if your firm’s “good faith efforts” to comply were thwarted by COVID-19 is not a free pass. Expect detailed questions from the staff. Be prepared to specify why COVID-19 prevented the firm from being ready. Be set to explain the specific issue and share your written remediation plan that includes a specific resolution date. Reg BI and Form CRS are major initiatives in the Commission’s campaign to protect “Main Street” investors. Regulators are ready and have devoted substantial resources into getting the industry ready. Now is the time to spend the effort to make sure your firm is ready. We are available to consult with you on any questions you may have concerning this alert. 1https://www.sec.gov/news/public-statement/statement-clayton-investors-rbi-form-crs 2https://www.sec.gov/news/public-statement/clayton-compliance-date-regulation-best-interest-form-crs 3 See, Office of Compliance Inspections and Examinations, Risk Alert, Examinations that Focus on Compliance with Regulation Best Interest, https://www.sec.gov/file/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf 4https://www.sec.gov/files/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf 5https://www.sec.gov/files/Risk%20Alert%20-%20Form%20CRS%20Exams.pdf 6https://www.finra.org/rules-guidance/key-topics/regulation-best-interest/preparedness 7https://www.finra.org/sites/default/files/2019-10/reg-bi-checklist.pdf 8https://www.sifma.org/wp-content/uploads/2019/09/SIFMA-Reg-BI-Program-Implementation-Guide.pdf Short bio missing