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SEC Provides Further Guidance on Reg BI Compliance

The latest Reg BI guidance addressed whether clients can 'waive' the rule's protections, whether affiliated firms can submit separate CRS forms, and whether firms have to build entirely new systems and processes to be in compliance.

Clients cannot “waive” the protections afforded by the Securities and Exchange Commission's Regulation Best Interest rule, which means brokers must adhere to the rule’s obligations regardless of the customer’s opinions, according to a new set of frequently asked questions on Reg BI released this week.

The updated FAQs address a variety of subjects, including whether client relationships between brokers and accredited investors are excluded from the rule, which they’re not, and whether brokers are still subject to the rule when recommending a client open a self-directed brokerage account where the broker will not be making subsequent recommendations, which they are.

The SEC also addressed the question of whether firms must build “new systems of controls and compliance” to fulfill the compliance obligation in the rule, writing that the rule’s authors had been purposefully flexible to give firms the ability to work within their existing systems.

“Broker/dealers are currently subject to supervisory obligations under federal securities laws and regulations, as well as applicable self-regulatory organization rules, and broker/dealers could choose to satisfy the Compliance Obligation by adjusting/building upon their current systems of supervision and compliance, as opposed to creating entirely new systems,” the FAQ said.

The SEC last updated its FAQ section on Reg BI in January, part of a continuing process to clarify industry concerns in the run-up to the rule’s June 30 implementation date. While SEC and FINRA representatives have repeatedly stressed that they will be looking for “good faith” efforts when examining firms in the months after it goes into effect, they also said firms should not be surprised if examiners immediately begin asking questions about compliance.

The previous FAQs addressed questions about the Form Client Relationship Summary (CRS) firms must create and supply to all retail clients, including whether firms should use hyperlinks to link to more detailed information in order to save space on the form’s tight two-page limit. In the latest FAQs on Form CRS, the SEC confirmed that firms would have to supply clients with a new Form CRS if they converted an investment advisory account into a brokerage account, even if an earlier CRS detailed both the advisory and brokerage services offered by the firm.

Additionally, firms are allowed to provide CRS forms in other languages, provided they also supply the SEC with an English-language copy. Finally, affiliated firms that offer different services (for example, advisory and brokerage services) can choose to create a single CRS or separate CRS forms detailing the specifics of each affiliated firm’s particular client services.

“But, affiliated firms cannot do both; each broker/dealer or investment adviser can only prepare one relationship summary summarizing all of the principal relationships and services it offers to retail investors (either a single combined relationship summary or separate relationship summaries),” the FAQ read.

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