While the Securities and Exchange Commission has provided some regulatory relief over the past month or so in light of the coronavirus pandemic, the compliance date for what are arguably two of the most onerous rules — Regulation Best Interest and the Customer Relationship Summary form — remains intact.
SEC Chairman Jay Clayton announced on April 2 that there’s no need to push off the June 30 compliance date as firms’ compliance is well underway.
Firms with account relationships comprising “a substantial majority of retail investor assets have made considerable progress” in adjusting their business practices, supplementing and modifying their policies and procedures, and otherwise aligning their operations and preparing for compliance with Reg BI and Form CRS, Clayton said.
Based on the securities regulator’s engagement over the past 10 months with the industry “and because the continued implementation of these conduct and transparency initiatives, individually and collectively, will significantly benefit Main Street investors,” the SEC believes June 30 for Reg BI compliance and “other requirements, including the requirement to file and begin delivering Form CRS, remains appropriate,” Clayton said.
Advisors or broker-dealers are encouraged to “engage” with the SEC if they’re 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,” Clayton added.
Stefan Simpson, chief compliance officer at Garrett Wealth Advisory Group in Franklin, Texas, told me in a mid-April email message that the SEC is right to press ahead. While the coronavirus pandemic “might make the implementation of the new regulatory requirements a bit more cumbersome for firm compliance officers and leadership, the show must go on!”
As to Form CRS, also being dubbed Form ADV Part 3, “what better time than now to communicate with clients?” Simpson said. “Most good advisors are relationship-focused and consequently may have clients with an ‘I don’t need to read that; I trust you’ way of thinking towards the current Form ADV.”
Simpson maintains that the average client’s “attention span doesn’t lend itself well to the current regulatory document requirements, so providing a short and simple one or two page document [with Form CRS] that hits all of the high notes is a great solution.” A “larger percentage of clients may actually read it — and not only read it, but understand it!”
What Exams Will Look Like
Clayton stated that when it comes to exams and enforcement, the agency will consider “the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs)” as they relate to the coronavirus pandemic.
Following the June 30 compliance date, SEC examiners will focus on whether firms have made “a good faith effort to implement policies and procedures necessary to comply with Reg BI, while also providing an opportunity to work with firms on compliance and other questions,” Clayton explained.
The Financial Industry Regulatory Authority said that it will take the same approach as the SEC when reviewing broker-dealers and their associated persons for compliance with Reg BI and Form CRS. FINRA, the enforcer of Reg BI, also emphasized that it will not ignore suitability violations.
Initial Reg BI exams will focus on assessing whether broker-dealers have made a good-faith effort to implement policies and procedures reasonably designed to comply and that are effective, the SEC stated in a Reg BI Risk Alert.
Form CRS exams will assess whether firms have made a good-faith effort to implement the form, “including reviewing the filing and posting of a firm’s relationship summary as well as its process for delivering the relationship summary to existing and new retail investors,” the agency’s Form CRS Risk Alert says.
After the June 30 compliance date, exams by the agency’s Office of Compliance Inspections and Examinations to assess implementation of Reg BI “will likely occur during the first year after the compliance date” and are designed primarily to evaluate whether firms have established policies and procedures reasonably designed to achieve compliance, the Reg BI alert explains.
OCIE also will evaluate whether firms have made reasonable progress in implementing those policies and procedures.