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