In an April 2, 2020, statement, U.S. Securities and Exchange Commission (SEC or Commission) Chairman Jay Clayton announced that notwithstanding the many challenges currently facing market participants, the SEC will not extend the June 30 compliance date for Regulation Best Interest (Reg BI). In his statement, Chairman Clayton said that “firms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances.” Adopted by the Commission in June 2019, Reg BI imposes a “best interest” standard of conduct on broker-dealers making recommendations of securities or investment strategies to retail clients. The June 30 compliance date also applies to the new rule requiring both broker-dealers and investment advisers to provide retail clients with a disclosure form about the nature of their relationship, known as Form CRS. See SEC Adopts Regulation Best Interest and Form CRS; Issues Investment Advisers Act Interpretations for a detailed analysis of Reg BI and Form CRS.
What this means to you:
Broker-dealers and investment advisers (for the Form CRS only) should, to the extent possible given the practical challenges imposed by current events, take all steps necessary to have the following in place as of the June 30 deadline:
- finalized policies and procedures to comply with Reg BI and Form CRS
- a program to train their workforce on their responsibilities under the new “best interest” standard of conduct
- a Form CRS template and a process in place to prepare and send the form to retail clients
- additional “up front” disclosures about potential conflicts of interest, scope of services, and fees and costs necessary to satisfy Reg BI but that will not fit within the very limited format of Form CRS
- policies and procedures to provide the subsequent transaction-by-transaction conflicts and risk disclosures mandated by Reg BI
As Chairman Clayton acknowledged, the announcement raises significant questions regarding how broker-dealers can comply with the requirements of Reg BI and Form CRS by the June 30 deadline, particularly when the workforces of many firms are operating under a remote work policy and with potentially limited capacity, especially with respect to new policies, forms and systems. When the Commission proposed Reg BI and Form CRS, the industry responded that they would take 18 months to implement properly. However, the Commission decided to proceed with a one-year implementation period, presumably so the rules would be in effect before the 2020 general election. Understanding the important investor protection goals that the rules are intended to achieve, the industry must proceed under the assumption that ready or not, the rules will become effective on June 30, 2020, as scheduled.
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