Reg BI and Form CRS – Key OCIE Inspection Targets

On June 30, 2020 two new Commission regulations went into effect. One was Regulation Best Interest, a rule born of long battles, designed to raise the standard for brokers giving clients investment advice. The other is Form CRS, designed to provide additional information to retail investors. OCIE will conduct inspections regarding compliance.

The goal of Regulation Best Interest is to assure that when “making a recommendation of any securities transaction or investment strategy . . . to a retail customer a broker-dealer . . . . [acts] in the best interest of the retail customer . . .” A number of groups challenged the implementation of the Regulation. The claims alleged that the Commission failed to comply with the requirements of Dodd-Frank, the predicate for the regulation, in writing it, that it would cause confusion among investors and was arbitrary. The Second Circuit Court of Appeals rejected the challenge. XY Planning Network, LLC. v. SEC, Nos. 19-2886 & 19-2893 (2nd Cir. Decided June 26, 2020).

As OCIE begins its inspections, compliance will be measured by four broad points: 1) The disclosure obligation, focused on furnishing customers the material facts regarding conflicts; 2) the care obligation, centered on ensuring that the broker-dealer exercises reasonable diligence, skill and care in making a recommendation; 3) conflicts – assessing if the broker-dealer established and is maintaining policies and procedures to address conflicts associated with its recommendation; and 4) compliance – ensuring that the broker-dealer established and maintains written policies and procedures to achieve compliance with Regulation Best Interest.

Form CRS, composed of a Form and its related rules, was adopted as part of a package of items focused on retail investors. Under the new provisions advisory firms are now required to file their relationship summaries with the agency and post the material on their public website.

Key to assessing whether the adviser has made a good faith effort to implement Form CRS are six points: 1) The deliver and filing of the form for existing investors; 2) the delivery and filing with new retail investors; 3) content — whether the relationship summary contains the required information; 4) formatting – if the disclosures are in accord with the instructions; 5) updates – if there are reasonable policies and procedures in place to ensure that the information is updated; and 6) record keeping – has the firm established the necessary record keeping systems.

Overall, the Regulation BI and Form CRS are designed to help protect the retail investor. OCIE previously announced inspections to ensure proper implementation will begin after June 30, 2020. Now is the time to prepare.