SEC Chairman Jay Clayton. (Photo: New York Law Journal) SEC Chairman Jay Clayton. (Photo: New York Law Journal)

As the enforcement date for the Securities and Exchange Commission’s Regulation Best Interest and Form CRS reaches its four-month anniversary, firms are “meeting their obligations,” SEC Chairman Jay Clayton said Monday during his opening remarks at the SEC’s Reg BI and Form CRS roundtable.

Reg BI and Form CRS “together with related interpretations adopted at the same time by the commission are designed to bring the legal requirements and mandated disclosure for firms serving retail investors in line with reasonable investor expectations,” Clayton said.

“Collectively, they are also designed to preserve retail investor access in terms of both choice and cost through a variety of investment services and products, fostering healthy and transparent competition,” he explained.

The SEC review has progressed on two fronts: First, staff from the Office of Compliance Inspections and Examinations has been conducting initial exams after the June 30 compliance date, Clayton said.

“Initial exams of Reg BI and Forms CRS have focused on assessing whether firms have made good-faith efforts to implement the requirements of both Reg BI and Form CRS,” he explained.

Second, the SEC Division of Trading and Markets and Investment Management Division’s Standard of Conduct Implementation Review Committee have been reviewing filings of Form CRS.

They have reviewed relationship summaries from a cross-section of firms to assess compliance with the content and format requirements of Form CRS, according to Clayton.

The staff members’ review so far has “generally found that firms have made efforts, and good efforts, to meet the content and format requirements of Form CRS. We have seen good examples of simple and clear disclosures. At the same time, it is clear that there are areas where compliance improvements are needed,” he said.

For example, “staff have identified filings that may lack certain disclosures or could be clearer or otherwise improved,” the SEC chief noted.

One point to be discussed at the roundtable, Clayton said, includes firms’ disciplinary history: “It is now clear to me that historically, before Form CRS, this information was not being brought to the attention of retail investors as it should have been.”

As for Reg BI, Clayton stated that the rule “establishes an enhanced standard of conduct that requires broker-dealers to act in the best interest of their retail clients, making it clear that they cannot place their own interest ahead of their retail customers’ interest.”

Reg BI, he continued, “applies when a broker-dealer recommends a securities transaction or investment strategy involving securities, including an account recommendation such as a retirement fund rollover,” and is a “substantial enhancement beyond broker-dealers’ traditional suitability obligations.”

OCIE’s Driscoll Weighs In

Pete Driscoll, head of the agency’s Office of Compliance Inspections and Examinations, explained that the roundtable was organized to highlight some concerns that the agency is seeing in its “initial exams.”

“What did we learn?” Driscoll asked, noting the importance of broker-dealers taking a “considered and thoughtful approach that tailors policies and procedures to meet the unique circumstances of each firm and its products.”

This includes “developing a thorough understanding of the firm’s practices and products so that the policies and procedures are tailored appropriately,” Driscoll said.

Registered reps, he continued, should also be given guidance on not just “what Reg BI requires, but specific examples of how to accomplish the requirements,” as well as having a firm’s written supervisory procedures “outlined, not just that requirements will be followed, but specify who, what, when and how those will be accomplished.”

Also, SEC staff noted during the roundtable that some firms’ written policies and procedures “discuss testing recordkeeping requirements,” Driscoll said. “We have heard from FINRA that firms should make sure to update their procedures to distinguish between Reg BI and FINRA’s suitability rule in appropriate cases.”

In addition, SEC staff highlighted that firms should consider “all conflicts, even potentially hidden ones,” Driscoll noted.

Regarding training, SEC staff noted the “significant change from in-person training to virtual training,” he stated. “This is not surprising, but we’ve also heard about the importance of using multiple platforms to deliver training” and that ongoing training can be helpful.

Turning to Form CRS, Driscoll stated that, as noted by SEC officials during the roundtable, there’s a “wide vary of methods” being used to comply with Form CRS, and “generally, firms appear to be doing so correctly.”

Specifically, he noted, “firms appear to be mostly avoiding legalese,” but some Form CRS’ could “still be improved in terms of readability.”

Other trouble spots include “generic, boiler plate language” being used on the forms as well as “some affiliated relationships” not being appropriately described, according to Driscoll.

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