On April 2, 2020, SEC Chief Jay Clayton surprised many observers by announcing that the regulator would not be extending the June 30, 2020 deadline for firms to comply with Form CRS and Regulation Best Interest. While Clayton’s announcement acknowledged the challenges presented by COVID-19, it noted that the SEC’s Office of Compliance Inspection Examiners (“OCIE”) will want to see that firms have made a “good faith effort” to comply with the regulations by June 30. The following week, on April 7, 2020, OCIE released two alerts for Reg BI and Form CRS, emphasizing that firms should develop “operationally effective” policies and procedures by the June 30 deadline and highlighting specific points of emphasis for examiners.
On April 8, 2020, FINRA issued its own guidance drawn from recent Reg BI “preparedness exams” and announced that its examiners would also be adopting the “good faith” approach described in OCIE’s alerts. Below, we summarize the recent OCIE and FINRA alerts along with some considerations and suggestions for firms that need to accelerate their implementation schedule over the next two months.
Form CRS To Do List
Applies to all SEC-registered investment advisers and broker-dealers.
- File the Form CRS by June 30.
- Make sure to include all SEC-required sections, mandatory language and formatting.
- Tip: Plan to deliver the Form CRS to all existing clients by June 30. Firms must deliver Form CRS to all existing clients by the earlier of either July 30 or the occurrence of certain triggering events (such as recommending that a client open a new type of account). We recommend delivering the Form by June 30 to avoid inadvertent violations of the new delivery requirement.
- Develop a system for delivering Form CRS to clients.
- Tip: Engage technology and operations stakeholders now for ample time to roll out new systems in advance of June 30.
- Tip: Make sure your firm’s system maintains records of all Form CRS deliveries.
- Revise policies and procedures to describe the firm’s process for updating Form CRS.
- Firms should update Form CRS within 30 days of any change that causes the Form to be materially inaccurate. Updated Forms CRS must be delivered to clients within 60 days of the event necessitating an update.
- Tip: Updated Forms CRS should highlight changes for clients in a short accompanying summary.
Reg BI To Do List
Applies to all SEC-registered broker-dealers.
- Establish project teams and working groups to address specific Reg BI requirements and establish timelines that focus on priorities.
- Tip: Stagger longer timelines with “quick wins” to keep momentum and a sense of progress among the working group.
- Scope the firm’s retail clients. Assume all individuals are “retail clients” unless they fall under an exception.
- Reg BI’s “retail client” definition does not conform to FINRA’s institutional client definition. For example, individuals with a $50 million or greater net worth are considered “retail clients” under Reg BI.
- Revise policies and procedures to describe the best interest standard and specifically identify the factors (e.g. cost) that representatives must consider when making a recommendation.
- Policies should highlight considerations around important events (e.g. rollovers) and complex products.
- Tip: Procedures should include a process for documenting the basis for recommendations that have greater costs than “reasonably available alternatives.”
- Eliminate sales contests, quotas and non-cash compensation that incentivize the sale of a specific type of security.
- Review broker-naming conventions to eliminate the use of “advisor” or “adviser” where appropriate.
- Tip: Enhance branch audit programs to include a review of marketing materials for use of the adviser/advisor terms.
- Enhance policies and procedures on conflicts to include processes for (i) identifying conflicts that representatives might face; (ii) identifying any limitations on products or services offered to clients; (iii) updating conflicts and disclosing changes to clients; and (iv) eliminating, and to the extent you cannot eliminate, mitigating, such conflicts.
- Tip: Maintain a detailed inventory of any such changes made to firm policies and procedures.
- Develop plans for training, testing and remediating noncompliance with Reg BI.
- Tip: Plan to provide training through multiple channels with a combination of in-person sessions, newsletters and modules.
- Tip: Identify whether certain aspects of firm training need to be administered prior to the June 30 implementation date.
While the recent guidance largely affirms the June 30 implementation date, if you believe COVID-19 is likely to disrupt your firm’s ability to comply with the deadline, we recommend early engagement with the SEC to describe those challenges and how they impact your firm’s timeline.