The SEC’s OCIE Issues Risk Alerts on Examinations Focusing on Regulation Best Interest and Form CRS

On April 7, 2020, the Office of Compliance Inspections and Examinations (OCIE) published two risk alerts regarding examinations that focus on compliance with Regulation Best Interest (Reg BI) and examinations that focus on compliance with Form Client Relationship Summary (Form CRS). These risk alerts describe the scope and content of initial examinations after the June 30, 2020 compliance date with the intent to help firms assess their preparedness for compliance with Reg BI and Form CRS.

Reg BI Examinations

Reg BI establishes a new standard of conduct under the Exchange Act for broker-dealers and associated persons of a broker-dealer. When recommending any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, a broker-dealer must act in the best interest of the retail customer at the time the recommendation is made. The broker-dealer must not place his/her own financial or other interest ahead of the retail customer’s interest. This general obligation is satisfied only if a broker-dealer complies with four component obligations—a disclosure obligation, a care obligation, a conflict of interest obligation and a compliance obligation.

OCIE will begin examinations to assess the implementation of Reg BI likely during the first year after the compliance date. The risk alert identifies information and documentation that the staff may review in connection with each of the four component obligations, to evaluate whether firms have established and implemented policies and procedures reasonably designed to achieve compliance with Reg BI.

For further information regarding Reg BI examinations, you can find the entire report here.

Form CRS Examinations

Form CRS and its related rules require firms to deliver to retail investors a brief customer or client relationship summary (relationship summary) that provides information about the firm. Firms must file an initial relationship summary with the SEC and post it to the firm’s public website (if the firm has one) by June 30, 2020. After filing the relationship summary, any new and prospective clients must promptly receive the filed relationship summary. Additionally, after the relationship summary is filed, all existing clients must receive the relationship summary within 30 days from the filing date. Should an adviser file the relationship summary on the filing due date, June 30, 2020, all existing clients must receive the relationship summary no later than July 30, 2020.

Initial examinations will focus on assessing whether firms have made a good faith effort to implement Form CRS, including in the following areas:

• Review the firm’s timely filing and delivery of the relationship summary to retail investors and all related policies and procedures
• Review whether the firm filed its relationship summary with the SEC
• Review whether the firm posted its relationship summary on its public website, if applicable
• Review whether the relationship summary includes all required information, and this information is true and accurate and does not omit any material facts necessary to make the required disclosures, in light of the circumstances under which they were made, not misleading
   
  • How does the firm describe the relationships and services offered to retail investors?
  • How does the firm describe its fees and costs, including disclosure of other account fees and costs a retail investor will incur?
  • How does the firm describe the cash and non-cash compensation structure for its financial professionals?
  • How does the firm describe conflicts of interest between the firm and its retail investors?
  • Whether the firm accurately discloses the legal or disciplinary history of the firm’s financial professionals?
• Review whether the relationship summary is formatted in accordance with the instructions (i.e. includes required wording, text features and is written in plain English)
• Review policies and procedures for updating the relationship summary, including the timing of updates when the information becomes materially inaccurate, timing and communication of information to retail investors after updates made, and process to highlight most recent changes to retail investors
• Review firm’s records of delivery of the relationship summary

For further information regarding Form CRS examinations, you can find the entire report here.