Investors Remain Front of Mind at the SEC: Approach to Allocation of Resources, Oversight and Rulemaking; Implementation of Regulation Best Interest and Form CRS

  • Source: sec.gov 

Treliant Takeaway:

Treliant has the expertise and tools to help broker-dealers and registered investment advisers (RIA) comply with the requirements of Regulation Best Interest (Reg BI) by the Securities and Exchange Commission’s (SEC) June 30, 2020 deadline.  If your business needs assistance with meeting its implementation requirements, particularly in light of the SEC’s April 2, 2020 announcement that it will not extend the compliance date despite current business disruptions, Treliant can help.

Article Highlights:

As we all know, the June 5, 2019 passage of Reg BI requires broker-dealers, and their associated persons, to act in the best interest of a retail customer when recommending any securities transaction or investment strategy involving securities to a retail customer.  Additionally, Form CRS requires SEC-registered investment advisers and broker-dealers to deliver client relationship summaries to customers that provide information about the firm, the services customers are receiving and how they will be charged for those services.  Firms must also file these relationship summaries with the SEC. The SEC’s “ambitious” June 30, 2020 implementation date has presented challenges for many firms, even under normal circumstances.  However, given the uncertain economic, business and social environment we all find ourselves in, firms are even more hard-pressed to complete the transformation of their sales practice and supervisory business models and begin enforcing new policies, procedures and controls that cover each component of the rule by the implementation date.

In an April 2, 2020 public statement, SEC Chairman Jay Clayton stated that based on the SEC’s communications with securities industry participants, retail investors and other regulators, and the belief that the continued implementation of Reg BI and Form CRS will significantly benefit Main Street investors, the June 30, 2020 compliance date will stand.  Chairman Clayton further explained that firms should continue to make good faith efforts to ensure compliance by June 30, 2020, including devoting resources as necessary.  If firms are having difficulty meeting their requirements or filings under Reg BI or Form CRS as a result of COVID 19, the Chairman indicated that the SEC expects firms to engage with the SEC’s staff.  He noted that he would expect the staff to take “unforeseen circumstances (and related operational constraints and resource needs) into account” in their examination and enforcement efforts.

Chairman Clayton’s statements also made clear that despite current remote working conditions at the SEC, the staff is continuing to focus its efforts on Reg BI examination scoping and is working closely with FINRA in preparation for examining firms and their associated persons for compliance with Reg BI and Form CRS.  During the initial examination period following the June 30 compliance date, the Chairman further disclosed that SEC examiners will be focusing on whether firms have made a good faith effort to implement policies and procedures necessary to comply with Reg BI’s requirements.

Lastly, Chairman Clayton intimated that the SEC’s Office of Compliance Inspections and Examinations will be issuing two Risk Alerts in the coming days to provide broker-dealers with specific information about the scope and content of initial examinations for Reg BI and provide broker-dealers and investment advisers with similar information with respect to Form CRS.

Chairman Clayton’s remarks make clear that the SEC has certain expectations of all broker-dealers and RIAs by the time the June 30, 2020 compliance date rolls around. Those expectations will vary depending on a variety of factors including: a firm’s business model and size, the variety of products and services offered by the particular firm, the firm’s pre-COVID 19 implementation efforts, the current impact on business operations, as well as steps firms take now to get caught up where necessary.  One thing is clear, the SEC is not taking its foot off the pedal when it comes to preparing for examinations of each firm’s implementation efforts.  Those firms that are not prepared by June 30 may find an enforcement action following its examination.  Given the June 5, 2019 release date of the rule, regulators will not likely consider any such enforcement action to be a surprise or “gotcha” type event.  Therefore, it is critical that firms take the necessary steps, either internally or through engaging a third party, to prepare for the inevitable implementation and despite our current unfortunate circumstances.

Author

Gino Ercolino

Gino Ercolino is a Director in Treliant’s Securities & Investment Management Compliance, Corporate & Regulatory Investigations, and Global Financial Crimes Compliance service areas. He has 25 years of experience as an attorney and financial regulator, serving in various leadership roles. Gino assists broker-dealers and registered investment advisors with satisfying their…