The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) staff held a joint roundtable on October 26, 2020 to discuss their initial observations of broker-dealer compliance with Regulation Best Interest (Reg BI) and Form CRS (Customer Relationship Summary) requirements since the June 30, 2020 deadline.
Reg BI, which took effect on September 10, 2019 and had a compliance date of June 30, 2020, established a standard of conduct for broker-dealers and their associated persons who recommend investments and investment strategies in securities that goes “beyond existing suitability obligations.” Specifically, Reg BI requires broker-dealers and their associated persons to “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer."
As noted previously by SEC Staff, examiners would assess whether a firm has made a good-faith effort to comply with Reg BI and Form CRS requirements. As a reminder, Form CRS is a disclosure form designed to help retail investors better understand the nature of their relationship with a financial firm and what services they can expect from it and its individual professionals.
During the roundtable, the SEC and FINRA noted that, among other measures, the presence of the following would indicate a good faith effort to comply with the regulatory requirements:
- A thoughtful, documented process for ensuring Reg BI and Form CRS compliance
- Policies and procedures tailored to achieve compliance with Reg BI and Form CRS
- Instructional guidance for registered representatives to comply with Reg BI and Form CRS requirements
- Testing policies and procedures for the effectiveness of the firm’s Reg BI and Form CRS compliance measures
- Regular updates of policies and procedures for Reg BI and Form CRS recordkeeping requirements
- Reg BI and Form CRS training for personnel
Regarding Reg BI compliance, the roundtable panelists noted that most of the firms examined appeared to have made good faith efforts. However, they also observed that some areas, such as those listed below, need improvement.
- Policies and procedures that outlined the Reg BI and Form CRS requirements but did not address what steps are needed to comply with these requirements, specifically:
- not designating principals to be responsible for supervision
- not implementing the procedures needed to comply with Reg BI’s four obligations
- Conflicts of Interest
- not having plans or procedures in place to test Reg BI and Form CRS policies and procedures
- not having plans or procedures in place to comply with the additional recordkeeping requirements associated with Reg BI and Form CRS
- Inadequate Reg BI and Form CRS training
- As with the policies and procedures above, some firms’ training covered the requirements of Reg BI and Form CRS but not specific steps associated persons should take to comply
- Some training consisted solely of providing the firms’ new procedures to personnel
- Some personnel did not receive adequate training on the new systems implemented to help with Reg BI and Form CRS compliance
- Emphasis of suitability regarding recommendations, but no focus on other factors related to best interest, including but not limited to:
- fees and costs
- reasonable alternatives
- Inadequate transparency regarding conflicts related to compensation, including:
- noncash compensation from the firm and third-parties
- forgivable loans to representatives by firms related to customer base and production when switching broker-dealers
- Distribution of Reg BI disclosures that use legal and technical language rather than “plain English”
- Delivery of disclosures in a manner that does not comply with SEC guidance regarding electronic delivery
According to the panelists, common Form CRS deficiencies included the following:
- Omitting required disclosures
- Using vague, nonspecific language
- Leaving out the required headers
- Revising the conversation starters
- Not placing conversation starters in the appropriate sections
- Using language more appropriate for a marketing document than a regulatory disclosure
- Not disclosing conflicts related to compensation
- Not providing accurate information regarding disciplinary history, along with:
- not answering disciplinary history questions with “Yes” or “No”
- adding language not required in the disciplinary history section (Note: Due to the high number of Forms CRS with inaccurate disciplinary history information, the SEC provided additional FAQs on this topic on October 8, 2020.)
- Not filing Form CRS - Some firms did not file by reason of not having retail customers, however, these firms did have such customers based on the new definitions of “retail customer”
- Not placing Form CRS in an easily accessible place on the firm’s public website
- Not maintaining evidence of the form’s delivery
- Not delivering the form in a manner that complies with SEC guidance on electronic delivery
- Including vague descriptions of certain fees in the form
- Failing to disclose that the firm offers proprietary products or offers a limited menu of products
Although the SEC and FINRA had stated that firms appeared to have made good faith efforts to comply with Reg BI and Form CRS requirements, the panelists did not indicate a timeframe for moving beyond these initial efforts. As Reg BI and Form CRS compliance will have been active for six months as of December 31, 2020, it is not unreasonable to anticipate that in 2021, the regulators may begin taking possible regulatory actions for violations of these requirements.
Broker-dealers should examine their efforts to assess areas of improvement that can be made to address some of the concerns that have been raised by the regulators.
How We Help
ACA can help you understand the compliance and operational issues presented by Reg BI as they relate to your retail business and help you comply with the regulation. Visit our Regulation Best Interest Resources page to find out more about our services.
For More Information
For more information on Reg BI and Form CRS, please contact your ACA consultant or contact us below.