Yesterday, SEC Chairman Clayton issued a public statement concerning the SEC’s implementation of Regulation Best Interest (“Reg BI”) and Form CRS, available here.1 The bottom line: firms should not expect a delay in the Reg BI or Form CRS’s June 30, 2020 compliance date. While the Chairman’s statement acknowledged the challenges that firms are facing and the significant resources they are allocating in response to the COVID-19 outbreak, the SEC will not provide an extension. That said, the Chairman suggested that the regulators may show some restraint in their examination of firms, at least in the initial post-June 30th period, stating that “examiners will be focusing on whether firms have made a good faith effort to implement policies and procedures necessary to comply with Reg BI.”2 This restraint, however, will be predicated on firms having made a “good faith effort” to implement policies and procedures necessary to comply with Reg BI and Form CRS by the compliance date.
With the deadline fast approaching, we highlight a few key takeaways from the Chairman’s statements and practical considerations for firms.
How can my firm demonstrate that we made a “good faith” effort to comply by June 30, 2020?
Whether a firm has made a “good faith” effort will depend on the facts and circumstances applicable to the firm, specifically: the impact of the COVID-19 outbreak and the impact on the firm’s operations, the size and nature of the broker-dealers business, and the firm’s efforts before the COVID-19 outbreak. The Chairman stated that he expects that “the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.”3
To evidence that the firm made good faith efforts to comply, firms may consider the following steps:
- First, firms should document compliance efforts and resources allocated to Reg BI and Form CRS leading up to national, state and local healthy and safety directives as well as the firm’s efforts and resources available after such orders. This information will be useful context for the overall state of the firm’s Reg BI and Form CRS programs. If applicable, this information will also support the narrative that, but for the outbreak, the firm would be on track.
- In connection with the above, firms should document systems and operational difficulties experienced arising from or exacerbated by COVID-19.
- To the extent a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with health and safety directives, the firm should consider notifying the SEC in advance of the compliance date and document these issues. In his statement, the Chairman noted that “[t]o the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with us.”4
- Recognizing that training will be particularly challenging in light of the circumstances, firms may send alerts and/or internal compliance bulletins to their financial advisers emphasizing the new requirements of the Care Obligation.5 These alerts should communicate the new requirements and the firm’s expectations.
Our implementation plans for the last three months are no longer feasible, what do we do?
The COVID-19 outbreak took everyone by surprise and the months leading up to a new rule are always the most important. No one anticipated that the final three months leading up to Reg BI’s implementation would be so challenging. Many firms’ plans to roll out new technology and compliance systems may no longer be feasible. Building on the “good faith efforts” standard, firms may consider the following in planning for the upcoming compliance date:
- Determine what the firm can do to reasonably comply with Reg BI on June 30. Firms need not (and likely cannot) devote the resources necessary to develop a perfect program. Many systems and planned overhauls may need to be put on hold until the current COVID-19 crisis abates.
- Leverage existing policies and procedures and frameworks to the greatest extent practicable (such as current suitability procedures and surveillance, disclosure processes, and conflicts review processes), recognizing that additional or enhanced policies and procedures may be implemented after the compliance date. The SEC’s Reg BI Adopting Release recognized that firms may build off existing systems and procedures, as opposed to creating new ones.6
- Do not over promise. Be thoughtful in drafting disclosures, policies and procedure, but do not over promise and impose obligations that the firm is not required to do. For example, the regulators have consistently said that there is no obligation to document every recommendation. If a firm, nevertheless, is planning to go beyond the regulatory requirement and document every recommendation, this should be a “Day 2” objective, unless the firm is assured it can fully comply with this requirement on Day 1.
Can we expect more guidance from the SEC?
Yes. Chairman Clayton indicated that the SEC’s Office of Compliance Inspections and Examinations will be issuing two Risk Alerts in the coming days. One alert will provide broker-dealers with specific information about the scope and content of initial examinations for Reg BI and the other provides broker-dealers and investment advisers with similar information with respect to Form CRS. We also anticipate the SEC’s Divisions of Investment Management and Trading and Markets will continue providing responses to frequently asked questions.7
For a more detailed discussion of Reg BI and Form CRS, you may access our related Client Alerts, “The Countdown Is On! Building a Reg BI Compliance Program as Deadlines Loom” (Sept. 3, 2019); “SEC’s Final Rules and Guidance on the Standards of Conduct for Broker-Dealers and Investment Advisers” (June 17, 2019).
If you have any questions or would like more information on the issues discussed in this alert, please contact the authors.