On April 2, 2020, SEC Chair Clayton issued a Public Statement answering one of the most significant questions for the brokerage community — will the compliance date for new Reg BI and Form CRS, currently scheduled for June 30, 2020, be extended as a result of the corona virus pandemic? The answer is a resounding “No,” likely surprising broker dealers expecting an extension.
Chair Clayton’s decision not to extend the compliance date was based on two key observations. First, the recent economic upheaval has only reinforced the importance of Reg BI as tool for investor protection in times of economic uncertainty. The rule establishes a new standard of conduct for broker dealers and their associated persons when recommending any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, prohibiting brokers from acting in any way other than their client’s best interests. With rampant job insecurity and extreme market volatility, the current environment appears tailor-made for a standard of care that protects retail customers against panic- and emotion-driven recommendations from their advisors. Second, brokerage firms most impacted by the new obligations imposed by Reg BI and Form CRS appear to have made considerable progress already in implementing the necessary changes to their practices, policies, and procedures, according to discussions the SEC, Finra, and other regulators have had with industry members and participants. Further delay would not materially change the compliance landscape.
For those who expected (or were rooting for) a delay, the news isn’t completely bad, however. Chair Clayton‘s statement recognizes the extraordinary demands on firms just now, and extends a potential life line to firms “…unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance…” In such situations, the firm should contact the SEC, which will “…take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in [its] examination and enforcement efforts….” Chair Clayton also signaled that there will be some leeway after the compliance deadline; examiners will initially focus on whether firms have made a good faith effort to implement policies and procedures necessary to comply with Reg BI and Form CRS, and will work with the industry on compliance and other questions.
OCIE Risk Alerts
On April 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued two Risk Alerts, one focusing on examinations for compliance with Reg BI and one for examinations for compliance with Form CRS. Both provide broker dealers with specific information about the scope and content of initial Reg. BI and Form CRS exams, which should help firms better prepare for the upcoming compliance deadline.
For example, OCIE noted that with respect to Reg BI, “… [i]nitial examinations will focus on assessing whether firms have made a good faith effort to implement policies and procedures reasonably designed to comply with Regulation Best Interest, including the operational effectiveness of broker-dealers’ policies and procedures…” and went on to detail some of the specific topics they expect to review. Similarly, OCIE detailed records and topics it expects to review as part of its initial Form CRS compliance exams, focused on the following topics: delivery and filing, Form CRS content, formatting, and policy and procedure updates.
What Should Brokers Be Doing Now?
In response to Chair Clayton’s statements and OCIE’s guidance, brokerage firms should:
- Continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances. Achieving compliance includes, among other things, (a) adjusting business practices, (b) supplementing and modifying policies and procedures, and (c) otherwise aligning operations and preparing for the requirements of Reg BI and the obligation to file and begin delivering Form CRS.
- Focus on the specific topics , records, and documents referenced in OCIE’s Risk Alerts and confirm that the firm has made any necessary changes or has a plan to address these changes by June 30, 2020.
- If the firm anticipates being unable to complete its preparations for the June 30, 2020 compliance date, it should document the steps already taken and those in flight or awaiting action and the pandemic’s impacts or restrictions preventing it from achieving full compliance by June 30, 2020. Keep in mind that the SEC expects firms to devote the necessary resources to achieve compliance, so the firm’s documentation should describe any issues in this regard.
- To the extent a brokerage firm has not meaningfully begun to prepare for compliance, you have no time to lose. Failure to have begun addressing the complex business, operational, and compliance (among others) changes required by the new regulations during the past 10 months is unlikely to result in much leniency by the SEC or FINRA. The SEC and FINRA have provided a number of tools to assist firms in complying with Reg BI and Form CRS, see, e.g., Finra’s webpage dedicated to SEC Reg BI (https://www.finra.org/rules-guidance/key-topics/regulation-best-interest).
Nancy Reich is a contributing senior consultant with Global Markets Advisory Group.
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.