Nearly four months after the Securities and Exchange Commission's best-interest standard and Form CRS went into effect, firms are mostly meeting their obligations, but issues persist, SEC and Financial Industry Regulatory Authority staffers said Monday.
The SEC hosted a virtual roundtable discussing initial observations on its best-interest standard, commonly known as Reg BI, and Form CRS, which were adopted in June 2019 and went into effect June 30. The rules were part of a package designed to address the obligations of broker-dealers and investment advisers when they provide recommendations or investment advice to retail investors.
"Generally, we have seen firms do a decent job implementing procedures and processes," said Bill St. Louis, senior vice president for member supervision at FINRA, during the roundtable discussion that focused on Reg BI. "For the most part, firms that were actively preparing for DOL were well positioned to leverage that work for their (Reg) BI and (Form) CRS procedures and processes." A 2016 Department of Labor rule on fiduciary advice with similar goals as Reg BI was struck down in federal court in 2018 due to regulatory overreach.
Reg BI aims to compel brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts, while Form CRS necessitates that firms disclose to retail investors the nature and scope of their services, the types of fees customers would incur, the conflicts of interest faced by the firm and the firm's disciplinary history.
Over the first few months of Reg BI examinations, John Polise, associate director of the SEC's office of compliance inspections and examinations' broker-dealer and exchange examination program, said his office is seeing firms still gear their policies and procedures toward FINRA's suitability rule, the standard to which broker-dealers were previously held.
With respect to rollover advice, Lourdes Gonzalez, assistant chief counsel for sales practices at the SEC's division of trading and markets, said firms should implement supervisory procedures to guarantee Reg BI compliance. "You also need to consider the conflict of interest obligation ... and ensure that you're either mitigating or perhaps eliminating any incentives for (financial advisers) to place their interest ahead of the retail customer's interest when making these rollover recommendations," Ms. Gonzalez said.
On a separate panel focusing on Form CRS, Alicia Goldin, senior special counsel at the division of trading and markets, discussed the importance of "plain language" when communicating with investors. "Our overall impression is that firms rose to the challenge of creating a concise and readable document and largely avoided legal jargon and technical terms," Ms. Goldin said. "That said, in terms of plain language we think there's always room for improvement. In the relationship summaries that we reviewed, the average reading level was 11th grade ... We encourage firms to aim for an eighth-grade reading level to really maximize readability."
In April, the SEC said initial Reg BI and Form CRS examinations would be less onerous because of the disruptions caused by COVID-19 pandemic.