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SEC Chair Jay Clayton
SEC Chair Jay Clayton

Clayton Says COVID-19 Underscores Need for Reg BI

The SEC chairman also introduced a new website for clients to assist them in reading their Form CRS, and said advisors should focus on ensuring rollover recommendations are sound.

The SEC's Regulation Best Interest June 30 implementation date is imminent and remains unchanged, according to a public statement from SEC Chairman Jay Clayton. Clayton also urged advisors and investors alike to prepare for the change and introduced a new website to help investors navigate the Form CRS that will be developed by advisors to offer accessible information on their obligations, duties and conflicts.

“In addition, our work across the Commission over the past several months has strengthened my view that the effects of the COVID-19 pandemic weigh substantially in favor of implementing the Reg BI and Form CRS requirements as soon as practicable,” Clayton said.

The new website includes an introductory video from Clayton, as well as answers to questions about the Form CRS and the investor/advisor relationship, including “what can I learn from a relationship summary” and “what are the different services that brokers and advisers offer?” The site also includes an introduction to investing, tips to protect investments, and additional resources, including investment education for youth, as well as tools to estimate what clients will need during retirement.

The SEC passed its Regulation Best Interest rule last year, setting an implementation date for June 30. As firms across the country raced to prepare, some questioned whether the SEC would delay implementation, particularly in light of the COVID-19 pandemic. But Clayton dispelled these rumors in April. He argued the SEC had worked with firms and regulatory agencies for 10 months to help them adjust business practices and align operations, and the amount of work done prior to the pandemic made the June 30 date suitable.

Noting that Reg BI’s obligations were all the more important in the COVID-19 environment, Clayton stressed that firms should particularly focus on areas where he believed there would be enhanced opportunities for mismanagement or misconduct. He urged firms to review rollovers and withdrawals from 401(k)s and other plans. While clients may be increasingly in need of liquidity during the crisis, he said advisors’ recommendations that investors should withdraw funds from such accounts should be “approached with care.” Clayton also said the CARES Act had allowed certain individuals with particular retirement plans to make early withdrawals of as much as $100,000.

“By waiving early withdrawal penalties and other limitations tied to retirement accounts, Congress provided investors with substantial flexibility to access these plans in order to weather financial hardships related to the pandemic,” he said. “However, to use that relief effectively, investors must navigate certain rules and make significant spending and investment decisions.”

Clayton also advised firms to be wary of recommending complex and risky products, including products that “focus on investment in less liquid and more volatile markets,” citing leveraged exchange traded products as an example. Additionally, he urged firms to be on the lookout for products and services touting COVID-19 benefits, including cures, treatments and testing that promised to expedite regulatory approval of such products. Clayton said many investment opportunities were part of alleged “pump-and-dump” schemes (the SEC filed one such claim in California last week). Any recommendation a broker makes regarding these kinds of products will be subject to the Reg BI rule, he said, and should be approached with caution.

TAGS: Industry
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