Reg BI, Form CRS Status Check: Is Your Compliance Where It Should Be?

As we head into fall, broker-dealers and advisors are receiving warnings from regulatory players on how far along their compliance should be with the Securities and Exchange Commission’s huge advice standards package — namely Regulation Best Interest and the customer relationship summary, or Form CRS.

Meanwhile, the CFP Board reacted to a serious drubbing from the Wall Street Journal in early August about the Board’s enforcement practices that led, in part, to the Board announcing new enforcement changes.

Fred Reish, partner at Drinker Biddle & Reath in Los Angeles, said during the law firm’s late July Inside the Beltway webcast that his “gut-level feeling” is that BDs are “already behind schedule,” despite the fact that Reg BI isn’t enforced until July 30, 2020. “There’s so much there that it’s going to be really hard to comply.”

The final Reg BI requires BDs to consider “cost of investments and investment strategies every time a strategy is recommended to a retail client,” Reish said. Broker-dealers now will be required to go over their processes for considering costs when it comes to recommending a variable annuity as well as the third-party recommendation regarding mutual funds, he explained. “What’s the process? Then the training and the policies and procedures” have to be developed.

This new requirement has BDs now mulling “adding monitoring to part of their contractual obligation,” Reish said.

Registered investment advisors need to “get going” on their compliance with the SEC’s advice-standards package this fall, Reish advised, “because, from my perspective, the SEC is taking a much broader view of conflicts of interest.”

For example, if an RIA recommends that an investor refer an IRA to them, “if the investor agrees to transfer the IRA, the [RIA] makes more money than if they didn’t transfer,” which amounts to a “conflict of interest recommendation that results in a benefit to the RIA,” Reish said. “Where is that disclosed to the clients? Is it in the [Form] ADV?”

Micah Hauptman, financial services counsel with the Consumer Federation of America, said on a separate webcast in mid-August that “going forward, firms will need to assess whether their current practices comply with Reg BI or whether they need to make changes.”

The extent to which firms “recalibrate their practices, if at all, will be a function of what they feel comfortable defending against regulators, in court and in arbitration,” he maintained.

Hauptman said that he doesn’t expect “significant changes” to broker-dealers’ product menus, and that third-party payment structures will continue — load funds, 12b-1 fees, revenue sharing and the like.

“There may be some firms that see business benefits to adopting less conflicted menus that use clean shares, level compensation, for example,” he added. “Time will tell whether firms will decide to eliminate conflicts that they themselves create, including the broader categories of sales contests, trips, bonuses” and emphasizing proprietary product sales.

The “biggest” compliance lift for firms, Hauptman said, will be disclosure. “There are new disclosures for brokers under Reg BI and Form CRS imposes new disclosures for brokers and advisors. This is likely to be costly and time consuming.”

The question for most firms regarding Form CRS will be: “How do you fit all of the required disclosures in two pages — if you’re a standalone broker or advisor — or four pages, if you’re a dual registrant, while still being accurate and precise?”

FINRA’s Reg BI Moves

The Financial Industry Regulatory Authority — the enforcer and examiner of Reg BI — also is mulling changes to its rulebook in light of the SEC’s new rule. Hauptman, for his part, doesn’t see the BD self-regulator releasing rule changes before Reg BI’s effective date.

Jim Lundy, a partner in Drinker Biddle & Reath’s Chicago office, told IA that it’s unclear if FINRA “will finalize rules and examine and enforce for those rules as well.” He said the self regulator could issue a rule before or after Reg BI’s June 30, 2020, effective date.

The SEC “will continually be actively engaged through an interagency implementation task force,” CFA’s Hauptman said, “the details of which have not been announced.”