401(k) Specialist Issue 2 - 2020 - 28

R
eg BI is almost here. Are you ready?
Because the new rule's entire compliance
process will require well-thought-out strategies
and tactics to be executed flawlessly and on time
by firms and their technology partners.
Barring a delay in implementation from either or
both of two legal challenges, advisors and their firms
will have to abide by the new standards set forth in the
Securities and Exchange Commission's (SEC) Regulation
Best Interest as of June 30, 2020. It requires
them to put their clients' interests ahead of their own
when investment recommendations are made and
mitigate any potential conflicts of interest.
" This rulemaking package will bring the
legal requirements and mandated disclosures for
broker-dealers and investment advisers in line
with reasonable investor expectations, while
simultaneously preserving retail investors' access
to a range of products and services at a reasonable
cost, " said SEC Chairman Jay Clayton in
a statement announcing the passage of Reg BI
back on June 5, 2019.
The package includes not only Reg BI itself,
but also the new Form CRS Relationship
Summary, and two separate interpretations
under the Investment Advisers Act of 1940.
Collectively, the actions aim to enhance and
clarify the standards of conduct applicable to
broker-dealers and investment advisors, help
retail investors better understand and compare
the services offered and make an informed
choice of the relationship best suited to their
needs and circumstances. It also seeks to foster
greater consistency in the level of consumer
protections provided, particularly at the point in
time that a recommendation is made.
Ever since the SEC voted to adopt the
1,300-plus-page package, the industry has
scrambled to analyze and begin to adapt to the
regulations to ensure they are in compliance
and " audit-ready " by the June 30 deadline-efforts
which have occasionally been hampered
by a lack of clear guidance from the SEC.
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ISSUE 2 2020 | 401kSpecialist.com
Additional guidance in the form of published
risk alerts on Reg BI and Form CRS
were expected by the end of March, according
to comments from Peter Driscoll, director of
the SEC's Office of Compliance Inspections
and Examinations (OCIE), who spoke in early
March at the Investment Adviser Association's
annual compliance conference.
The Reg BI risk alert was expected to
include a sample of the documents the SEC
is likely to request at the outset of an exam-
which would look at how firms have set up
compliance programs in light of the new rules.
Those exams could begin in July, while more
data-driven exams looking at how advisors
make product recommendations are scheduled
to begin in early 2021.
" By that time there will be a healthyenough
population of trading at firms to start
ingesting that into our analytics tools that we
have for trading, " Driscoll told the compliance
conference attendees.
Form CRS
A major component of the new Reg BI
standards is Form CRS (Customer Relationship
Summary), which is the requirement
that RIAs and broker-dealers provide a brief
relationship summary to retail investors at the
start of the relationship.
The SEC says Form CRS will bring
" transparency and comparability " to the process
by which an investor chooses an RIA or broker-dealer,
but it also brings some compliance
headaches.
Per the SEC, the form can't exceed two
pages and must be written in a plain-English
standardized " Q&A " format. It must describe
the firm's fees, any possible conflicts of interest,
and disclose whether the firm or its employees
have any legal or disciplinary history.
Form CRS can be delivered digitally or via
paper, and will outline the types of client relationship
offered by the RIA or broker-dealer,
and the required standard of conduct for those
relationships.
Form CRS must also include a link to a
dedicated page on the SEC's website, which
offers information about broker-dealers and
investment advisors, among other things. This is
intended to allow the retail investor to clarify if
they are dealing with an RIA or a broker-dealer,
and what difference that might make to
their experience.
Firms also have to provide the form (also
filed with the SEC) whenever making a new
account recommendation, at the time of a rollover
recommendation for retirement accounts,
or similar types of events.
Firms also need to send a new Form CRS
whenever there are changes to the disclosure,
such as pricing structure changes, or whenever
the relationship summary must be updated.
Firms also have to keep a record of these communications
for possible regulatory reviews.
Technology solutions will be critical to
ensuring Form CRS compliance. CRM and/
or back-office systems must to be able to detect
when the form is required to be delivered and
automatically (electronically) sent.
What is " Best Interest " ?
Despite weighing in at more than 1,000 pages,
Reg BI mandates best-interest treatment of
brokerage and advisory clients without actually
providing a crystal-clear definition of what
" best interest " means.
Firms will have to show they have a reasonable
basis for believing their recommendations
are in the client's best interest under the rule's
new standard of care obligations. While most
broker-dealers have long argued they already
(and always) put customers' best interest first
anyway, Reg BI requires much more than
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401(k) Specialist Issue 2 - 2020

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