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Reg BI and Form CRS: Are you prepared to evidence compliance during your next exam?

Sep 30, 2020

The June 30, 2020, Regulation Best Interest (Reg BI) and Customer Relationship Summary (Form CRS) compliance date has come and gone.

If you are a broker-dealer, you must satisfy the four component obligations — care, disclosure, conflict of interest and compliance — in order to fulfill the best interest standard. And, if you are a broker-dealer or registered investment advisor (or both) you should have developed and provided a Form CRS to your retail customers.

With the deadlines behind us, it’s a good time to take stock of your development process and determine whether you have adequate documentation in place to support compliance with timing and process requirements at the time of your next regulatory examination.

The difference between suitable and best interest

Although the securities industry has long followed a suitability standard, the best-interest provisions expanded on that concept to require that broker-dealers and their associated persons ensure that recommendations for specific investments or types of accounts be in the best interest of the retail customer.

The difference between an investment being “suitable” and in the “best interest” of the retail customer is an important concept to understand in order to fully comply with the standard, and may have its challenges when it comes to proving compliance.

When making recommendations that are suitable, the broker must consider the customer’s income and net worth, investment objectives, risk tolerance and other security holdings. The best-interest standard enhances the suitability requirements by requiring, in addition to consideration of the customer’s investment profile (suitability), the potential risks, rewards and costs (product cost and compensation) associated with the recommendation.

Reasonably available alternatives must also be considered, and the recommendation may not place the financial or other interest of the broker-dealer, or such natural person, ahead of the interest of the retail customer.

Although the broker-dealer may consider all of these factors in the process of developing a recommendation, demonstrating that consideration may be harder than it sounds because whether the investment or strategy is in the best interest of someone could be subjective in nature. How will an examiner (who may have preconceived thoughts about “best interest”) know that you considered the relevant risks and rewards, for example, before ultimately arriving at the recommendation that was made?

How you can demonstrate your compliance to examiners

Training investment personnel about “best interest” is probably a good starting point. But, it’s just that — a starting point — and hopefully you have already completed that.

You might consider having investment personnel attest to following best-practice standards in relation to each recommendation, or implement a checklist of the factors considered (e.g., risks, rewards, cost, alternatives, etc.), to be completed in conjunction with the recommendation.

If you are especially concerned about examiner expectations, you may want to consider including some additional notes about why you thought the recommendation was in the best interest of the customer.

The broker-dealer disclosure required under Reg BI must be provided prior to or at the time a recommendation about any securities transaction or investment strategy (including account recommendations) involving a securities transaction is made. If you deliver the disclosure electronically (by email), procedures to retain evidence of the timing of delivery may be easier than for other delivery methods. Most commercial electronic delivery systems provide evidence of compliance with the Electronic Signatures in Global and National Commerce (E-SIGN) Act as well as a delivery record. If you are not using a commercial delivery system, manual procedures for evidencing electronic delivery are possible but somewhat more cumbersome. If the customer has not authorized electronic delivery, standard mail or in-person delivery will have to occur. Procedures to evidence delivery by these methods are also needed.

The Form CRS requirements, which apply to broker-dealers and registered investment advisors, are more straightforward. Once the Form was created, delivery to existing retail investors was required within 30 days of filing the form with Web CRD® and/or IARD. Since the filing deadline was June 30, 2020, delivery of Form CRS should have occurred no later than July 30. What documentation do you have to evidence initial delivery of Form CRS either electronically, by mail or in-person delivery?

Going forward, there are several triggers for providing Form CRS to retail investors, including delivery before or at the earliest of the following:

  • Recommending an account type, securities transaction or investment strategy involving securities;
  • Placing an order;
  • Opening a brokerage account;
  • Opening a new account (that is different from the retail customers’ existing account);
  • Recommending rollover or transfer of retirement account assets into a new or existing account or investment; or
  • Recommending or providing a new brokerage service or investment (that doesn’t involve opening a new account and would not be an existing account).

The broker-dealer or registered investment advisor must also provide Form CRS within 30 days of a request, and within 60 days after any update. How will you evidence delivery of the Form CRS in conjunction with a triggering event?

On April 7, 2020, the Office of Compliance Inspections and Examinations (OCIE) released Risk Alerts describing the intended examination focus for assessing implementation and operational effectiveness of compliance with Reg BI and for assessing compliance with Form CRS.

Will you be ready to demonstrate compliance with all aspects of Reg BI and Form CRS at your next exam?

Join Wipfli’s complimentary webinar, Asset management webinar: OCIE risk alert updates, covering the April 7, 2020 and other recent OCIE Risk Alerts for valuable information regarding what to expect related to Regulation BI and Form CRS at your next exam, as well as a discussion of other compliance related issues noted during OCIE examinations. We’ll review findings and discuss action steps you can take to uncover and address specific risk areas.

You can also click here to learn about Wipfli’s Reg BI and Form CRS compliance assessment. By having a regulatory specialist like Wipfli come in, you can make sure you’re able to prove to SEC examiners that you put the appropriate policies and procedures in place, correctly prepared and delivered your disclosures, properly trained your staff, and gathered all the evidence of the implementation you will need.

Author(s)

Kathy Enbom, CRCM
Principal, Compliance
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Reg BI and Form CRS compliance assessment
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