Compliance Deadline Approaching for Regulation Best Interest and Form CRS

The June 30th deadline to comply with Regulation Best Interest (Reg BI) and Form CRS is almost here. We’ve summarized the requirements of both to help broker-dealers and investment advisers confirm they are ready to comply.

Regulation Best Interest

Reg BI requires broker-dealers to act in the best interest of their retail customers when recommending any securities transaction or investment strategy. To comply with Reg BI, broker-dealers must adhere to the following when interacting with retail customers:

• Disclosure Obligation: Broker-dealers are required to disclose the following:
  • Material facts about the relationship
    • Scope of services offered
    • Limitations of offerings
    • Conflicts
    • Whether the broker-dealer provides ongoing monitoring
  • Material facts about recommendations
    • Fees and compensation
    • Risks
• Care Obligation: Broker-dealers are required to exercise diligence, care, and skill when making recommendations to customers. Recommendations must be in the best interest of the customer, and potential costs, risks, and rewards need to be considered along with the customer’s particular situation
• Conflict of Interest Obligation: Broker-dealers are required to develop written policies and procedures to disclose, mitigate, or eliminate conflicts of interest. These policies and procedures must include the following:
  • Firms must mitigate conflicts of interest that would provide an incentive to a broker-dealer to put its interests ahead of a customer’s interests
  • Firms with limited offerings or only proprietary offerings must prevent these limitations from putting the interests of the broker-dealer and registered representative ahead of their customers’ interests
  • Firms must eliminate sales contests, quotas, bonuses and noncash compensation related to the sales of specific products within a specified timeframe
• Compliance Obligation: Broker-dealers must establish, maintain, and enforce policies and procedures for compliance with Reg BI

Form CRS

The new Form CRS, “Customer Relationship Summary” (also referred to as “Form ADV Part 3”), will require both registered investment advisers and broker-dealers to provide retail investors with a two-page or four-page plain English and layered disclosure document. This document consists of a relationship summary disclosing:

1. The types of client and customer relationships and services the firm offers
2. The fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services
3. Whether the firm and its financial professionals currently have reportable legal or disciplinary history
4. How to obtain additional information about the firm

Investment advisers and broker-dealers are encouraged to use graphic, hyperlinks, and electronic formats in their Form CRS Relationship Summary.

For Investment Advisers, Form CRS is being incorporated into the current Form ADV – noted as Part 3. Firms will file copies of their relationship summaries with the SEC, update the disclosures when the information becomes materially inaccurate, and communicate any changes to retail investors who are existing clients or customers.

Regulatory Oversight

Both FINRA and the SEC have announced they will be following up with firms to confirm they are complying with these new requirements.

William St. Louis, FINRA Senior Vice President and Regional Director, stated at the SIFMA C&L New York Regional Seminar that the regulator would begin reviewing firms in November to assess their Reg BI compliance readiness. In addition, he said that FINRA would coordinate its reviews with the SEC to eliminate any duplication of effort.

The SEC issued a public statement on April 2, 2020 stressing the importance for broker-dealers and investment advisers to continue to place their customers above their own interests. After the implementation date, SEC examiners will focus on firms’ efforts to develop compliance systems, policies, and procedures for Reg BI, Form CRS, and related regulations and on working with firms to resolve any compliance questions in these areas.

OCIE will conduct Reg BI exams after the compliance date and will focus on whether firms have developed and implemented policies and procedures for compliance with Reg BI. In addition, the alerts summarize the areas that OCIE will review, including the documents that it will request.

Regarding Form CRS, OCIE will assess firms’ efforts to provide disclosure information in the Form CRS. The exams will also focus on whether firms made a good faith effort to implement Form CRS.

ACA Guidance

In guidance, both the SEC and FINRA have stated that during initial exams, they will take into consideration a firm’s “Good Faith Effort”. To evidence good faith efforts to comply, firms may consider the following:

• Document compliance efforts and resources allocated to Reg BI and Form CRS implementation
• Document any issues the firm encountered
• Contact the SEC if your firm cannot meet the deadline due to business disruptions

ACA Resources

• Webcast: Are You Ready for Regulation Best Interest?
• Webcast: Form CRS: What Firms Need to Know
• Webcast: Form ADV: Regulation BI and Form CRS
• Blog: Investment Adviser Standard of Conduct and Form CRS - What You Need to Know (Part 1 of 2)
• Blog: Investment Adviser Standard of Conduct and Form CRS – What You Need Know (Part 2 of 2)

For More Information

If you have questions about complying with Reg BI or Form CRS, please contact your ACA consultant or contact us here.

Contact Us