August 2, 2021

Volume XI, Number 214

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July 30, 2021

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SEC Roundtable on Reg BI and Form CRS

The U.S. Securities and Exchange Commission (SEC) hosted a virtual roundtable in late October to discuss the its Regulation Best Interest (Reg BI) and Form CRS. With a few months of observations from examinations since the June 30, 2020, compliance date, SEC and FINRA officials provided insights and tips for broker-dealer compliance with the new rules. The roundtable kicked off with brief remarks from SEC Chair Jay Clayton followed by a discussion among SEC staff from the Office of Compliance Inspections and Examinations (OCIE); and the Divisions of Trading and Markets and Investment Management. FINRA staff also participated.

Regulation Best Interest – Issues and Observations. The speakers focused the first segment of the roundtable on the various new obligations under Reg BI. Officials noted that while the COVID-19 pandemic has in many ways changed the way firms approach training, most firms have shown a dedicated commitment to effectively training employees on compliance with Reg BI, although they observed weaknesses in training where the emphasis was on the requirements of the rules rather than on how to comply. Post-training tests for personnel were suggested with fines for not taking the training on time. They emphasized the concern with late training and providing updates on a timely basis to representatives.

Beginning with a discussion of the compliance obligation, officials stressed that firms must have written policies and procedures as the foundation of compliance. However, policies must not simply restate the standards – firms must appropriately tailor them to their specific business models. Firms cannot simply restate the rule, they must instead specifically document their process for complying with the rule in the context of their individual business models. Officials noted that while the new Regulation BI builds on existing requirements, it is broader, including a focus on investment costs.

Officials next discussed the care obligation, again stressing cost and alternatives as critical factors to analyze in order to satisfy the care obligation; although as stated in the adopting release, the lowest-cost option is not necessarily the answer. Officials cautioned that while the suitability standard may be useful in considering this obligation, Reg BI is broader than the FINRA suitability standard. They specifically provided, for example, that firms must contemplate possible alternatives for the customer, taking into consideration costs. They emphasized that examiners would ask for the basis of a recommendation, i.e., documentation. As for concerns with compliance with the care obligation, they pointed out:

  • The need for ongoing training

  • Over-reliance on the use of certifications such as “I complied with Regulation BI,” which may not be enough without documentation reflecting consideration of costs and reasonable alternatives

  • Continuing confusion by some firms regarding what constitutes a “recommendation” triggering CRS and BI disclosures

  • Rollovers, particularly with respect to cost considerations and other factors outlined in the FAQs.

Next, the panel addressed the conflict-of-interest obligation to which they observed firms taking different approaches. They emphasized the FAQs with respect to conflicts, including for rollovers how there are specific examples for implementing a supervisory function, although firms must still consider their business model and structure of business in each individual case. They also cited the FAQs that cites the importance of addressing mitigation efforts, which do not negate disclosure of the conflict they mitigate, and raised the issue as to whether the practice of providing representatives forgivable loans for recruitment purposes creates conflicts. As for concerns with conflicts, while stating that most firms have done a good job at eliminating them, some nontraditional forms of compensation could pose an issue and must be analyzed in terms of consistency with Regulation BI. Finally, they observed that firms should identify whether the consideration of reasonable alternatives could be impacted by conflicts of interest, i.e., implicitly causing a representative to promote a product for which there is some bias.

The panelists closed by talking through the disclosure obligation. The speakers stressed that Reg BI disclosures should be written in easy to understand, plain language, avoiding the use of legalese. The ultimate goal of disclosures is to explain to customers the capacity in which a firm is recommending a course of action. Panelists closed the session by emphasizing, once again, that while firms have risen to the challenge, there remain many ways and avenues to improve disclosures. Panelists applauded the use of specific disclosures on issues such as rollovers. They also emphasized e-delivery rules, which were referred to in the adopting release discussing, among other aspects, obtaining advance consent for e-delivery.

For additional guidance, the roundtable speakers regularly referenced the Reg BI FAQs.

Form CRS – Issues and Observations. Speakers began the discussion on Form CRS by reviewing the purpose of the form – to assist customers in deciding what best suits their investment objectives. Speakers emphasized the importance of transparency. Both SEC and FINRA staff noted that each agency has resources, training, education and committees aimed at effectively assisting broker-dealers and investment advisers with implementing the various requirements of Form CRS. Overall, staff observed that many firms rose to the challenge in complying with the new requirements; however, officials noted a few areas for improvement.

Much of the discussion on Form CRS focused on firms’ compliance with technicalities of the new rules. Officials again stressed the notion that all submissions should be easy to read. Specifically, a Senior Special Counsel in the SEC’s Division of Trading and Markets suggested that Form CRS disclosure language should be written at an eighth-grade reading comprehension level. With no template summary, firms are encouraged to be flexible in design, using white space, charts and different fonts. Other officials echoed similar ideas such as expressly answering questions posed, using succinct descriptions to provide context, avoiding vague descriptions, filing on time and displaying the completed Form CRS on the firm’s website.

Agency officials called special attention to disciplinary history disclosures as the biggest concern seen thus far. They noted that many firms have declined to answer questions regarding disciplinary history. The officials urged attendees to review the FAQs that address critical components of disciplinary history disclosure, including not omitting or modifying the heading, requiring simple yes or no answers from firms, and objecting to the addition of any language attempting to explain disciplinary history.

The webinar concluded with remarks from the SEC OCIE Director encouraging firms to review Form CRS (available here), and the Form CRS FAQs (available here) on the SEC website, and to reach out to the implementation committee with any questions. The roundtable will be posted on the SEC’s website.

© 2021 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 314
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About this Author

James G. Lundy, Drinker Biddle, regulatory investigations lawyer, financial services compliance attorney
Partner

James G. Lundy represents clients in Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), self-regulatory organization, and other financial regulatory agency investigations and examinations, and compliance and governance counseling, white collar criminal investigations, and complex business litigation.

With 12 years of senior SEC experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various...

312-569-1120
Sandra Dawn Grannum, Finance, Securities Lawyer, Drinker Biddle Law Firm
Partner

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has tried more than 50 arbitrations before the NASD and FINRA through award represented brokerage firms, banks, clearing firms, and associated persons. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

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David W. Porteous Corporate Attorney Faegre Drinker Biddle & Reath Chicago, IL
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David Porteous routinely counsels clients in the investment management, broker-dealer and financial services industries on regulatory matters including examinations, investigations and enforcement proceedings as well as complex civil and securities-related litigation. In addition, he assists clients in developing and implementing compliance and regulatory risk management plans and represents clients in complex civil and securities litigation.

Regulatory Agency Background

Before entering private practice, David was a staff attorney in the Securities & Exchange Commission...

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Fred Reis Faegre Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney
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Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

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Sophie H. Gotlieb Litigation Attorney Faegre Drinker Law Firm
Associate

Sophie Gotlieb assists clients with various aspects of legal proceedings and trial preparation, including legal research and the drafting of motions and other legal memoranda.

Sophie served as a judicial extern for the Honorable Donovan W. Frank, U.S. District Court for the District of Minnesota, and as a 711 law clerk for the Cook County (IL) State Attorney’s office (Felony Trial Division). She has provided assistance on discovery requests and compilation, case management and case dispositions.

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