What just happened?
SEC Chairman Jay Clayton announced that the Commission will not extend the compliance date for Reg BI and the filing date for Form CRS beyond June 30, 2020 despite the recent social, economic and market turmoil caused by the COVID-19 pandemic.
In a Public Statement dated April 2, 2020 (https://www.sec.gov/news/public-statement/statement-clayton-investors-rbi-form-crs), Chairman Clayton stated that
At any time, and particularly in times of uncertainty, investment professionals should not put their interests ahead of the interests of their clients and customers. Reg BI codifies this fundamental principle. Investors should also know the services they are receiving and how they will be charged for those services. Form CRS requires that.
The SEC does not think that the recent crisis will materially impact firms’ abilities to meet the deadlines:
Over the past ten months, the Commission and the staff have engaged extensively with broker-dealers, investment advisers, retail investors and other market participants, as well as FINRA and other regulatory partners, regarding the implementation of Reg BI and Form CRS. We believe firms with account relationships comprising a substantial majority of retail investor assets have made considerable progress in (1) adjusting their business practices, (2) supplementing and modifying their policies and procedures, and (3) otherwise aligning their operations and preparing for the requirements of Reg BI and the obligation to file and begin delivering Form CRS.
As to problems broker-dealers and advisers may have in achieving compliance in a work-from-home environment, the Chairman stated:
To the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with us. I expect that the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.
Chairman Clayton noted that “in the coming days” OCIE will release two Risk Alerts: one “provides broker-dealers with specific information about the scope and content of initial examinations for Reg BI,” while the other “provides broker-dealers and investment advisers with similar information with respect to Form CRS.”
What does this mean?
Despite market disruptions, dramatic falloffs in revenue, and sometimes improvised work environments, firms will be expected to meet the requirements announced last June.
By June 30, BDs must have systems in place to meet the four obligations specified in Reg BI:
- Conflict of Interest; and
For information on each of these duties and the steps BDs must take to meet them, please download the NRS white paper “Regulation Best Interest Exams Are Coming” at at https://www.nrs-inc.com/insights/resources/regulation-best-interest-examinations-are-coming/.
As noted above, Chairman Clayton’s release emphasized that for each of these areas, firms must:
- Adjust their business practices;
- Supplement and modify their policies and procedures; and
- Otherwise align their operations and prepare for the requirements of Reg BI
This will necessarily involve developing and modifying systems as appropriate for each firm’s specific business practices. These systems include those for disclosures, training, testing, and more.
IAs and BDs are required to file Form CRS by June 30. Some basic requirements include:
- The Form CRS must not exceed 2 pages (or equivalent length in e-format – unless firm is a dual registrant, in which case it may use up to 2 pages each for the IA and BD, or prepare a combined 4-page form) and will use standardized headers to make it machine readable for data aggregation and comparison purposes
- The Form is designed to be short, accessible and facilitate comparisons
- Instructions require a Q&A format, encourage use of “white space” and text features to make it easier to read
- Limited prescribed wording permits firms to describe most topics using own words
- But required to keep within length restrictions
- Required to use standardized headers and “Conversation Starters” (questions retail investors are encouraged to ask of their financial professional)
- Also, must use prescribed statements about the standard of conduct owed based on the capacity in which the firm acts
- The text must use plain English, be concise and consider retail investor’s level of financial experience
While some questions still remain on how to most effectively complete Form CRS (including “How in the world do I fit this all in 2 pages?”), BD and IA firms should now be taking the initial steps to:
- Identify and assemble the information required;
- Determine the extent to which you will rely on providing electronic links to required information;
- Work closely with IT to determine where on your website the Form CRS and these links will go and the lead time needed to meet the June 30 deadline
What should firms do now?
Most of us have spent all of our time adjusting to the new reality of a pandemic. However, the SEC has assumed that you have spent much of the time between last June and the onset of the current crisis preparing for Reg BI and Form CRS. If you have spent your time this way, now is the time to finish those preparations. If you have not yet been focused on Reg BI and Form CRS, or if you’ve been hoping that a pending lawsuit by state attorneys general would result in Reg BI being overturned, now is the time to act.
The forthcoming Risk Alerts on Reg BI and Form CRS should at least provide guidance on what the SEC will expect to see when they visit (in person or, increasingly, in a remote examination). In the meantime, you will need to devote some of your (increasingly precious) resources to bringing your firm into compliance by June 30.
How can NRS help?
NRS has a full suite of services to help you stay confident in your compliance including:
- On-Demand training for Regulation Best Interest and Form CRS
- Form CRS Technology and Consulting Solutions
- Regulation Best Interest Targeted Compliance Reviews
- Reg BI Disclosure Technology Solutions (Rep-specific information)
- Policy and Procedure content and updates