SEC details Reg BI compliance goals as enforcement deadline looms
While the coronavirus creates turmoil in the economy and markets, the SEC is moving ahead with plans to enforce the biggest change in advisor standards of conduct in years – and the agency is shedding new light on what it is prioritizing.
High on the agency’s list? Evidence that firms have made a "good-faith" effort to comply with Regulation Best Interest and related rules, according to the commission.
The SEC had recently announced that the coronavirus pandemic that has effectively shut down huge portions of the economy would not delay the June 30 compliance date for the regulations. This week the agency issued risk alerts to help firms understand what examiners will be looking for when they start scrutinizing how brokers and advisors are complying with the new advice rules.
"Based on conversations we have had with the industry, we know firms have made substantial progress in implementing these new rules," Peter Driscoll, the director of the SEC's Office of Compliance Inspections and Examinations, says in a statement. "We understand that this implementation will be an iterative process, and our focus will be on firms continuing good faith and reasonable efforts, including taking into account firm-specific effects from disruptions caused by COVID-19."
FINRA, which will coordinate with the SEC on Reg BI examinations, said that it will follow the commission's lead, and that initial exams "will focus primarily on assessing whether firms have made a good-faith effort to establish and implement policies and procedures reasonably designed to comply with Reg BI and Form CRS."
"However, as always, FINRA will take action in the event FINRA observes indications of customer harm or conduct that would have violated current standards (e.g., suitability)," the regulator says in a statement.
In both the risk alerts on Reg BI and Form CRS, the SEC says that the first wave of examinations will be looking for firms to demonstrate that they have thought through the rules and are taking compliance seriously.
For Reg BI, that includes setting policies and procedures to address the four components of the rule: the obligations around disclosure, care, conflicts of interest and compliance.
The SEC cautions brokers that Reg BI exams could involve requests for documents on disclosures, compensation, account monitoring and lists of proprietary products they sell to clients.
For the care obligation, SEC examiners anticipate scrutinizing brokers' decision-making process for determining that any given recommendation serves the client's best interest. On conflicts, SEC examiners will want to see documentation demonstrating how brokers are identifying, mitigating or, in the case of barred practices like sales contests, outright eliminating conflicts of interest.
For advisors working under the Form CRS requirement, the new risk alert "should leave no doubts in the minds of RIA firms that they need to take the SEC's current Form CRS filing and delivery deadlines seriously," says GJ King, president of RIA in a Box, a compliance software provider.
"If they have not already, impacted investment advisors must take immediate action to ensure they meet the June 30 deadline," King says in an email.
In the new risk alert, he sees the SEC once again calling attention to how firms are describing their fees and expenses, conflicts of interest and their disciplinary histories.
"RIAs should expect those sections of the Form CRS to receive particular scrutiny during examinations," he says.
King says that the SEC "deserves credit" for publishing extensive guidance on the new rules, which have included multiple sets of frequently asked questions and other tools before the latest risk alerts.
"However, since the SEC has put forth so much information and guidance on the new Form CRS, RIA firms should not be surprised by heightened expectations during examinations as it relates to meeting the new Form CRS requirements," King says. "SEC-registered firms required to file the Form CRS are not going to be able to plead ignorance during an audit."