Financial Institutions Law Alert

On October 26, 2020, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) held a joint roundtable on best practices and initial observations from the first four months of Regulation Best Interest and Form CRS implementation. Below, we summarized the highlights from the discussion so firms can review their current Reg BI and Form CRS programs and adjust them as necessary in advance of OCIE and FINRA examinations.

  • Documenting Certain Types of Recommendations: Reg BI does not require that representatives document the rationale for every recommendation, but firms should consider a documentation requirement for recommendations of complex products or investments that are ostensibly inconsistent with a customer’s risk or investment profile to show why the recommendation was in the customer’s best interest.
  • Revise Suitability-based Procedures to Meet Best Interest: Be sure to revise procedures that refer to the old suitability standard to address the new best interest obligation. Procedures should specifically identify the new factors that must be considered when making a recommendation (i.e., cost). Procedures should also address the broad definition of “recommendation” to include discussions that may rise to the level of a call to action even when there is no resulting investment activity.
  • Who, What, Where and When: Procedures must identify who the responsible parties are for executing firm policy and how often those processes must be conducted. Procedures should also identify testing requirements.
  • Train to the Process, Not Just the Rule: Training should address the steps representatives must take to comply with new requirements and not just summarize the new rules. Firms should consider disciplinary measures such as fines for representatives that fail to complete required training.
  • Periodic Reviews of Compensation Arrangements: Consider revising firm policies to include periodic reviews of the firm’s compensation arrangements with third parties. Firms should be cognizant of (i) opaque forms of compensation, such as vendors paying reimbursements or gifts tied to sales of specific securities; (ii) any higher-cost “reasonably available alternatives” available to customers and whether such products should be eliminated from the firm’s offering suite; and (iii) whether comparable products pay level compensation to the firm and/or representatives.
  • Customer Risk Profiles: Some firms have developed client questionnaires to assign risk scores to customers and assist supervisors in reviewing recommendations for best interest concerns.
  • Form CRS Low-Hanging Fruit: Check your Form CRS to ensure you are not running afoul of these fundamental requirements:
    • Does your Form CRS display the effective date?
    • Is your Form CRS available on the firm’s website in an easily identifiable location with an appropriate title? Identify the Form CRS as such and do not use a generic, non-descriptive title (i.e., the panel noted that some firms inappropriately identified Form CRS as only a “regulatory required disclosure document”).
    • All conversation starters should appear in the relevant sections of Form CRS (not just at the end) and should not alter the language of the conversation starters.
    • Headings must be “machine readable;” (i.e., an MS Word formatting feature that creates bookmarked headings when the document is converted to PDF.)
    • The required headings must follow the Form CRS language, verbatim.
    • Content must be in plain English and should conform to the formatting and font requirements of the regulation.
  • Form CRS Disciplinary History: Firms can break out their responses to the question regarding disciplinary history to answer on behalf of the firm and representatives separately, but firms must be cautious not to downplay the nature of relevant discipline with a description. Firms should consider simply referring customers to the official reporting sources (the FINRA and SEC websites).

We will continue to monitor SEC and FINRA guidance for more updates and insight into the new regulations.

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