The Securities and Exchange Commission will begin examining firms for compliance with Regulation Best Interest and the customer relationship summary, Form CRS, in July, according to John Polise, associate director of the Broker-Dealer and Exchange group within the agency’s Office of Compliance Inspections and Examinations.
During a recent Reg BI virtual panel held by the Financial Industry Regulatory Authority, Polise said firms should prepare for some standalone Reg BI and Form CRS exams as well as regular exams that incorporate Reg BI and Form CRS oversight.
The compliance date for Reg BI and Form CRS is June 30.
“One could imagine a focus on sales practice or suitability and then having a [Reg] BI component in that as well,” Polise said.
To start, the SEC will conduct “phase exams so that our examiners can become conversant with what they’re seeing and report back to the commission on any issues or themes,” Polise said, “and then gradually over the course of the year and next year getting more [Reg] BI exclusive exams done.”
Bari Havlik, head of exams at FINRA, stated on a separate virtual panel held Tuesday, that FINRA examiners’ initial Reg BI exam approach, “which we’ll be working very closely with the SEC on, is what the SEC has communicated in the last few months: first six months of Reg BI we’ll be looking at how firms approach implementing policies, procedures and controls to comply with Reg BI and working with the SEC to provide further guidance to the industry.”
In 2021, FINRA will begin to “take a harder line approach to looking for compliance,” Havlik continued.
Bill St. Louis, senior vice president and firm group leader for FINRA member firms assigned to the Retail and Capital Markets firm groupings, stated on the virtual panel that Reg BI reviews by the Financial Industry Regulatory Authority in 2020 will be part of overall exams.
“If a customer complaint comes in that’s focused against the firm or broker, our ‘cause exam’ team might do a standalone Reg BI review depending on what the complaint is alleging and the time period of the activity,” St. Louis explained. “That might lead to standalone Reg BI-focused examination.”
Also, if a Form CRS is filed “that raises material questions for us, that might generate a standalone exam,” St. Louis said. “But primarily, at least in 2020, most of the exams will be associated with firm examinations that will be looking at other issues, and Reg BI and Form CRS.”
Wendy Lanton, a founding principal of Lantern Investments and Lantern Wealth Advisors, who also serves as the firm’s chief compliance officer, said on the panel that COVID-19 has, “without a doubt,” impacted her firm’s compliance schedule. Her firm is having “a more challenging time” with compliance, she said, namely the “training piece is very difficult and also getting Form CRS done and getting someone to print it.”
That said, Lanton said that her firm will approach preparing for a Reg BI and Form CRS exam as “we approach any exam.”
“There shouldn’t be anyone who’s not prepared for what’s expected,” Lanton said. “I think the SEC has done a pretty good job of saying, ‘hey, if we come and audit you, these are the things we’re going to look at.’ Certainly a dialogue with the exam team will go a very long way in saying, ‘this is what we’ve done,’ because every firm has a different approach.”
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