With the June 30 compliance date for Regulation Best Interest and Form CRS approaching, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) released two risk alerts this week detailing what examiners will be looking for once the rule goes into effect.
Initial examinations will focus on whether firms have made a “good faith effort" to put policies and procedures in place that are reasonably designed to comply with the regulations. OCIE Director Pete Driscoll called the regulations critical, saying the commission was not discounting the impacts of the spread of the coronavirus throughout the country.
“Based on conversations we have had with the industry, we know firms have made substantial progress in implementing these new rules,” he said. “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.”
The risk alert for Reg BI lists the documentation requests that may be appropriate to ensure firms are meeting the four central obligations within the rule (disclosure, care, conflict of interest and compliance). For disclosure, potential documents for review include a schedule of fees and charges paid by retail customers and the disclosures that accompanied them, the broker’s compensation methods for registered personnel, any disclosures related to monitoring client accounts and a full list of any proprietary products that may be sold to clients. To consider whether brokers are meeting the care obligation, examiners might ask to see how brokers make recommendations on significant investment decisions, and how they make recommendations concerning risky or expensive products.
Additionally, the Form CRS risk alert asks that firms be able to show they will have sent the summary to clients within one month of the compliance date. According to John Polise, the OCIE’s national director for the broker/dealer and exchange program, the office was working with staff from both FINRA and the SEC to harmonize Reg BI examination programs.
Though some suggested the SEC might postpone Reg BI's compliance deadline, Chairman Jay Clayton announced last week that the June 30 deadline would remain in place, noting that firms’ preparation for complying with the rule was already well underway before the spread of COVID-19. The SEC has made some changes, including postponing firms’ submission date for Forms ADV. FINRA has also postponed all in-person mediation and arbitration until after May 30.
Previously, MarketCounsel President Brian Hamburger said that the SEC was well-equipped to change how they approached examinations and inspections even in light of COVID-19.
“I understand why they’re being coy or maintaining discretion about the current position of examination resources, but I have to imagine the SEC is going to pivot, and they’ll pivot to other effective means of conducting those investigations,” he said.