SEC Provides Guidance to Broker-Dealers = and=20 Investment Advisers Regarding Examinations for Compliance with = Regulation Best=20 Interest and Form CRS
DOWNLOAD PDF =- Borger=20 Gilligan, Frank =20 =20
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Industry Alerts =
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- Schedules of fees and charges including custodian fees, account=20 maintenance fees, fees related to mutual funds and variable annuities, = and=20 other transactional fees and product-level fees;
- Disclosures of such fees and costs;
- Methods of compensation;
- Disclosures related to monitoring of retail customers=E2=80=99 = accounts;
- Disclosures on material limitations on accounts or services = recommended to=20 retail customers; and
- Lists of proprietary products sold to retail customers.
CARE = OBLIGATIONS
The Care Obligation requires a broker-dealer to exercise reasonable=20 diligence, care, and skill when making a recommendation to a retail = customer. In=20 order to assess compliance with this obligation, OCIE will likely assess = the=20 following:
- Information collected from retail customers to develop their = investment=20 profiles;
- The firm=E2=80=99s process for having a reasonable basis to = believe that=20 recommendations it makes are in the best interest of the = firm=E2=80=99s retail=20 customer;
- How recommendations are made in regards to significant investment=20 decisions; and
- How the broker-dealer makes recommendations related to more = complex, risky=20 or expensive products.
CONFLICTS OF INTEREST=20 OBLIGATIONS
The Conflict of Interest Obligation requires a broker-dealer to = establish,=20 maintain, and enforce written policies and procedures reasonably = designed to=20 address conflicts of interest associated with its recommendations to = retail=20 customers. OCIE is likely to examine policies and procedures to assess = whether=20 and how the broker-dealers addresses certain conflicts of interests,=20 including:
- The elimination of sales contests, sales quotas, bonuses, and = non-cash=20 compensation based on the sale of specific securities or specific = types of=20 securities within a limited period of time;
- How the firm identifies and assesses conflicts of interest;
- How the firm discloses conflicts of interest; and
- What steps the firm has taken to mitigate or eliminate conflicts = of=20 interest.
COMPLIANCE=20 OBLIGATIONS
The Compliance Obligation requires a broker-dealer to establish, = maintain,=20 and enforce written policies and procedures reasonably designed to = achieve=20 compliance with Reg BI. Firms must also file their initial = relationship=20 summaries with the SEC, and post the current relationship summary on its = website.
The SEC=E2=80=99s Risk Alert can be found here: Risk Alert: Regulation Best Interest.
FORM CRS
In addition to the requirements of Reg BI, broker-dealers and=20 investment advisers will be required to provide a brief = =E2=80=9Crelationship summary=E2=80=9D=20 disclosure (Form CRS) to retail investors. Information required in = Form=20 CRS includes a summary of information about a firm=E2=80=99s services, = fees and costs,=20 conflicts of interest, legal standard of conduct, and the disciplinary = history=20 of the firm and its financial professionals. More detailed information = on the=20 requirements of Form CRS can be found here.
OCIE will likely examine the firm=E2=80=99s controls, remediation of = noncompliance,=20 training, and periodic review and testing of its policies and = procedures. =20 This will include a review of: (1) whether the firm has filed its = relationship=20 summary and whether it is posted on its website; (2) the process for = delivering=20 the relationship summary to existing and new retail investors; and (3) = the=20 policies and procedures to assess whether they address the required = relationship=20 summary delivery processes and dates.
OCIE will also likely review a firm=E2=80=99s relationship summary to = assess whether=20 it includes all required information and contains true and accurate = information=20 and does not omit any material facts necessary in order to make the = required=20 disclosures, in light of the circumstances under which they were made, = not=20 misleading.
A more comprehensive list of the information likely to be requested = by OCIE=20 can be found here: Risk Alert: Form CRS.
SEC=E2=80=99S STATEMENT ON COVID-19
In the alerts, the SEC issued a brief statement on the effect of the = COVID-19=20 pandemic on the industry and regulators alike, and acknowledges that = COVID-19=20 has created challenges for many firms. The SEC notes that it = continues to=20 monitor the effects of COVID-19 on market participants, including = investment=20 advisers and broker-dealers; however, it has not extended the compliance = date=20 for Reg BI or Form CRS.
For more information on this release, the requirements of Regulation = Best=20 Interest and Form CRS, or other securities law matters, please contact = Dickinson=20 Wright, PLLC.
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