Update: Our
May 11, 2020, alert provides new information on the June 30,
2020, compliance deadline for Regulation Best Interest (Reg BI) and Form CRS.
As McGuireWoods reported in an
April 6, 2020, legal alert, the U.S. Securities and Exchange Commission (SEC) has indicated that it
will not be delaying the June 30, 2020, compliance deadline for Regulation
Best Interest (Reg BI) and Form CRS, despite granting extensive relief in
other areas in response to COVID-19.
On April 7, 2020, the SEC Office of Compliance Inspections and Examinations
(OCIE) issued two Risk Alerts intended as guidance for broker-dealers and
investment advisers about the expected scope and content of the initial
examinations for compliance with Regulation BI and Form CRS. Notably, the
SEC continues to emphasize that it will be looking for good faith
compliance efforts. In the
press release announcing the issuance of the Risk Alerts, OCIE Director Peter Driscoll noted, “We understand that this
implementation will be an iterative process, and our focus will be on firms
continuing good faith and reasonable efforts, including taking into account
firm-specific effects from disruptions caused by COVID-19.”
Some of the key points of each of the Risk Alerts are discussed below.
McGuireWoods is prepared to discuss and advise on any questions with
respect to the alerts or Reg BI and Form CRS compliance efforts.
Broker-Dealer Examinations Focusing on Compliance With Reg BI
With respect to Reg BI, not surprisingly, OCIE will focus on, among other
things, whether a broker-dealer complies with the four main component
obligations.
-
Disclosure Obligation
– A broker-dealer must provide a retail customer disclosure of material
facts relating to the scope and terms of the relationship, and relating
to conflicts of interest associated with the recommendation. In this
regard, OCIE may request and review fee and expense disclosure,
compensation methods, proprietary product sales practices, disclosures
on material limitations on accounts/services recommended to retail
customers and disclosures regarding retail customer account monitoring.
-
Care Obligation
– A broker-dealer must exercise reasonable diligence, care and skill
when making a recommendation to a retail customer. In this regard, OCIE
may request and review the information provided by retail customers,
the process for establishing a reasonable belief that a recommendation
is in the best interest of the retail customer (including the risk
assessment process), and the process for making significant decisions
or decisions with respect to complex products.
-
Conflict-of-Interest Obligation
– A broker-dealer must establish, maintain and enforce written policies
and procedures reasonably designed to address conflicts of interest
associated with its recommendation to retail customers. In this regard,
OCIE may request and review any incentives for an associated person to
place interests ahead of the interest of the retail customer; conflicts
associated with material limitations; conflicts related to sales
contests, sales quotas, bonuses and non-cash compensation; and how
policies and procedures establish a structure for identifying and
mitigating conflicts.
-
Compliance Obligation
– A broker-dealer must establish, maintain and enforce written policies
and processes reasonably designed to achieve compliance with Regulation
Best Interest as a whole. In this regard, OCIE may request and review
policies and procedures and evaluate any controls, remediation of
noncompliance, training and periodic review and testing including as
part of those policies and procedures.
The Risk Alert also includes an appendix that contains a sample document
request list. OCIE notes that:
This document provides a sample list of information that the [examination
staff]… may request when conducting examinations of broker-dealers
regarding Regulation Best Interest. OCIE has published this document as a
resource for broker-dealers. This document should not be considered
all-inclusive of the information that OCIE may request or the validation
and testing OCIE may perform of firm policies and procedures. Accordingly,
OCIE will alter its requests for information as it considers the specific
circumstances presented by each firm’s business model. OCIE understands
that not every document listed below will be applicable to every firm.
The sample document request is a helpful tool for broker-dealers to review
in assessing the scope and comprehensiveness of their Reg BI policies and
procedures.
Review the full Risk Alert.
Broker-Dealer and Investment Adviser Examinations Focusing on
Compliance With Form CRS
With respect to Form CRS:
-
Delivery and Filing
– OCIE may (1) review whether the firm has filed its relationship
summary, and whether the relationship summary is posted on the firm’s
public website, if any; (2) evaluate the process for delivering the
relationship summary to existing and new retail investors; and (3)
review policies and procedures to assess whether they address the
required relationship summary delivery processes and dates.
-
Content
– OCIE may review a firm’s relationship summary to assess whether it
(1) includes all required information; and (2) contains true and
accurate information and does not omit any material facts necessary to
make the required disclosures. For example, relationship summaries may
be reviewed for information about how the firm describes the
relationship and services it offers to retail investors, how the firm
describes its fees and costs, how the firm describes the manner in
which its financial professionals are compensated, how the firm
describes conflicts of interest, and whether the firm accurately
discloses if it or its professionals have legal or disciplinary
history.
-
Formatting
– OCIE may review a firm’s relationship summary to assess whether it is
formatted in accordance with the instructions.
-
Updates
– OCIE may review a firm’s policies and procedures for updating the
relationship summary to: (1) assess how and whether a firm updates and
files its relationship summary within 30 days after any information
becomes materially inaccurate; (2) assess how and whether a firm
communicates these changes to retail investors; and (3) assess the
firm’s process for highlighting to retail investors the most recent
changes.
-
Record-keeping
– OCIE may review the firm’s records related to delivery of the
relationship summary, and the policies and procedures regarding
record-making and record-keeping, to assess how the firm complies with
applicable delivery and record-keeping obligations.
Review the full Risk Alert.
FINRA Issues Statement on Risk Alerts
Also on April 7, 2020, the
Financial Industry Regulatory Authority (FINRA) issued a statement
confirming its examinations staff will take the same approach the SEC
outlined in the Risk Alerts with respect to Reg BI and Form CRS compliance
reviews during FINRA examinations. Like the SEC, FINRA stated that it will
be looking for good faith compliance efforts. FINRA further emphasized that
it stands “ready to work with firms and the SEC on issues that may arise in
the course of examinations for compliance with Reg BI and Form CRS and
understand(s) that the coronavirus disease (COVID-19) has created
challenges for firms.”
Firms should consider these Risk Alerts as they continue to prepare their
compliance programs and operations for compliance with the Reg BI and Form
CRS requirements in advance of the June 30, 2020, deadlines.
McGuireWoods stands ready to help with these preparations and offer
guidance on the requirements of Reg BI and Form CRS, as well as the
implications of the Risk Alert.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.
