OCIE Announces Plans to Assess Compliance With Reg BI and Form CRS as Scheduled

On April 7, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) released two risk alerts regarding Regulation Best Interest (Reg BI) and Form CRS. This follows SEC Chairman Jay Clayton’s announcement that the SEC will not extend the compliance date for Reg BI and Form CRS (discussed here).  

Notably, while Reg BI applies only to broker-dealers, Form CRS is a requirement for investment advisers as well, making these risk alerts relevant to both types of firms.  As reflected in the risk alerts, OCIE will begin examinations to assess firms’ compliance with Reg BI and the rules governing the completion of Form CRS within the first year after these requirements take effect on June 30, 2020. According to the risk alerts, these initial examinations are designed primarily to evaluate whether firms have made a “good faith effort” to establish policies and procedures reasonably designed to achieve compliance with Reg BI and the rules governing the completion of Form CRS. OCIE also will evaluate whether firms have made reasonable progress in implementing the Reg BI policies and procedures as necessary or appropriate. 

Although the risk alerts acknowledge the unique circumstances under which firms are currently operating because of COVID-19, OCIE expects firms to have such reasonably designed policies and procedures in place. 

Background

The SEC released Reg BI on July 12, 2019. Reg BI establishes a “best interest” standard of conduct for broker-dealers when making recommendations to retail customers. This standard will apply to recommendations involving securities transactions, investment strategies and types of accounts. The SEC also adopted new rules and forms that require broker-dealers and investment advisers to deliver to new and existing retail customers a summary of the relationship between the customer and the firm, known as Form CRS. Firms are required to deliver Form CRS to existing customers by July 30, 2020.

We previously discussed the releases adopting Reg BI and Form CRS and the related SEC guidance here.

Risk Alert Highlights

OCIE identified several areas that its exam teams may focus on as part of the Reg BI review. These key areas include the firm’s compliance with the following:

• The Disclosure Obligation, which requires broker-dealers, prior to or at the time of the recommendation, to provide retail customers, in writing, full and fair disclosure of
  • all material facts relating to the scope and terms of the relationship with the retail customer
  • all material facts relating to conflicts of interest that are associated with the recommendation
• The Care Obligation, which requires broker-dealers to exercise reasonable diligence, care and skill when making a recommendation to a retail customer 
• The Conflict of Interest Obligation, which requires broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to address conflicts of interest associated with its recommendations to retail customers
• The Compliance Obligation, which requires broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Regulation BI as a whole

Importantly, the risk alert provides a summary of how OCIE may assess how firms are complying with each of these obligations, including a list of documents it may request and review as part of its review. The risk alert also includes an appendix listing information OCIE may request when conducting its examinations of broker-dealers regarding Reg BI. 

To test compliance with the rules governing Form CRS, OCIE will 

• confirm that the firm has filed the Form CRS with the SEC and posted the Form CRS on its website
• evaluate whether the firm timely delivered the Form CRS to existing and new retail customers 
• assess whether the firm’s Form CRS is formatted in accordance with the instructions (e.g., it includes particular wording where required, it uses text features where required and it is written in plain English)
• review the firm’s written policies and procedures, recordkeeping processes and delivery processes and dates in light of the obligations imposed by Form CRS

Although OCIE identified these as the primary focus areas, the OCIE Staff may select additional risk-based areas for review identified through the course of the exam.  

The risk alerts provide firms with additional visibility into how OCIE may review a firm’s Reg BI program and the documents it may request as part of its review. Firms should consider using this information to assess their implementation plans for Reg BI and Form CRS and whether they are prepared to meet OCIE’s requests.  

Also, although not addressed in this announcement, firms should expect the Financial Industry Regulatory Authority examiners as well as state regulators and exam teams to be similarly focused on firms’ compliance with these requirements.   

The risk alerts are available here (Reg BI) and here (Form CRS). Sidley will continue to monitor developments from the SEC in light of COVID-19 and the upcoming deadlines related to Reg BI and Form CRS.