Notwithstanding the COVID-19 pandemic and disruption in the financial markets, the U.S. Securities and Exchange Commission (SEC) continues to press forward on implementation of Regulation BI and Form CRS. Recent examination risk alerts provide guidance for financial intermediaries.

Regulation BI And Form CRS
According to a statement by Chair Clayton on April 2, 2020, the Commission plans to maintain the June 30, 2020 implementation date for Regulation Best Interest, including the requirement to file the new Form CRS. Regulation BI establishes a new standard of conduct for broker-dealers and associated persons when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Form CRS requires registered investment advisors and broker-dealers to deliver to retail investors and to file with the Commission a brief customer or client relationship summary that provides information about the firm. Given the Chair’s support for continued implementation, expect additional scrutiny from the examination and enforcement programs in the coming years. 

Examination Risk Alerts
Particularly for broker-dealer firms and investment advisors, the SEC examination program is the leading edge of enforcement activity. Today’s examination imperatives fuel tomorrow’s enforcement actions. Broker-dealers and dual registrants should pay particular attention to recent examination risk alerts focused on Regulation BI and Form CRS.

Regulation BI
After June 30, 2020, the Office of Compliance Inspections and Examinations (OCIE) will begin examinations assessing whether a broker-dealer has satisfied its Regulation BI obligations. According to the OCIE risk alert, a broker-dealer must comply with four component obligations to satisfy its obligation under Regulation BI:

• Disclosure Obligation: A broker-dealer is required to disclose to a retail customer all material facts regarding (1) the scope and terms of the relationship and (2) conflicts of interest associated with the recommendation. To determine compliance, staff may assess the capacity in which the recommendation was made, material fees and costs assessed to the retail customer, and material limitations on the recommended investments.

• Care Obligation: A broker-dealer must practice reasonable diligence, care, and skill when making a recommendation to a retail customer. A broker-dealer must understand and consider potential risks, rewards, and costs with respect to the retail customer’s investment profile when making a recommendation to the retail customer.

• Conflict-of-Interest Obligation: A broker-dealer is required to establish, maintain, and enforce written policies and procedures to address any conflicts of interest related to recommendations made to retail customers.

• Compliance Obligation: A broker-dealer must establish, maintain, and enforce written policies for complying with the entirety of Regulation BI.

OCIE outlines the types of documents a broker-dealer can expect the staff to request when assessing compliance with each component obligation of Regulation BI. The staff will review disclosures made to retail customers, fee and expense schedules, materials related to compensation, account opening files and customer risk profiles, documents relating to the process for making recommendations and monitoring accounts, documentation of conflicts, lists of proprietary products sold to customers, and written policies and procedures for compliance with Regulation BI. As part of the examinations, staff may select additional topics beyond the identified focus areas for review if they identify additional risks.

From a substantive point of view, examination and enforcement staff are likely to scrutinize fees and expenses, compensation arrangements, rollovers, and the sale of high-priced and complex products. Given other Commission priorities, registrants also should be mindful of accounts held for elderly customers.

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