The June 30th compliance deadline for Regulation Best Interest and Form CRS is quickly approaching. It presents new compliance requirements for broker-dealers and investment advisers engaging in a retail business.

The SEC recently published a risk alert, Examinations that Focus on Compliance with Form CRS. OCIE expects to roll out its examination program in the year following the deadline. The examinations are expected to focus on the reasonable effectiveness of a broker-dealer’s Regulation Best Interest compliance program and the implementation and compliance by broker-dealers and investment advisers of the Form CRS regulatory regime.

Risk alerts help firms to prepare, assess, and design an effective Regulation Best Interest Program. Similarly, the SEC also created a Form CRS Small Firm Compliance Guide to support firms in creating and brainstorming various requirements.

What is Form CRS?

Along with Regulation Best Interest, the SEC adopted Form CRS disclosure and delivery obligations for broker-dealers and investment advisers engaging in a retail business. Its regulatory regime requires firms to prepare a disclosure document setting forth basic information about the firm’s services and deliver it to existing and new retail investors.

Guidance on Examinations

Examiners are expected to review Form CRS delivery obligations, content, formatting, updating, and records maintenance. The key points identified by OCIE are as follows:

Delivery and Filing

Examiners will review the timeliness of filing Form CRS with the SEC and posting the current Form CRS on a firm’s public website, if applicable. They will also focus on compliance with the delivery of Form CRS to new and existing retail investors.

Initially, the delivery of the relationship summary to existing retail investors is due by July 30, 2020, and before or at the time of:

  • The opening of a new account that is different from the retail investor’s existing account;
  • A recommendation of a rollover of assets from a retirement account into a new or existing account or investment; or
  • A recommendation of a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account (e.g., a first-time purchase of a direct-sold mutual fund through a “check and application” process).

Thereafter, the delivery of the relationship summary to new retail investors is due before or at the earliest of:

  • Entering an investment advisory contract with the retail investor;
  • A recommendation to a retail investor of an account type, a securities transaction, or an investment strategy involving securities;
  • Placing an order for the retail investor; or
  • The opening of a brokerage account for the retail investor.

Likewise, a firm’s policies and procedures addressing the availability and delivery of Form CRS, as well as supporting records, will also be within the scope of an examination.

Content

Form CRS prescribes specific content disclosures. Examiners will review the extent to which a Form CRS discloses all material facts and required information. The accuracy of this information will also be assessed. Relationship summaries will be reviewed for the description of relationships between parties, fees and costs, compensation, conflicts of interest, legal history, and disciplinary history.

Formatting

The structure and format are still under review, including obligations in terms of length and scope. According to OCIE, examiners will review a firm’s relationship summary to assess plain English drafting. Additionally, there will be other specific formatting instructions that examiners will review for compliance.

Updating

Examiners will review the timeliness of updating the disclosure. A disclosure becomes materially inaccurate within 30 days. They will also assess whether the firm summarizes and communicates any changes to retail investors within 60 days of the required update.

Recordkeeping

Examiners may review the firm’s records related to the delivery of the relationship summary and the policies and procedures regarding record-making and recordkeeping. The review would assess how the firm complies with applicable delivery and recordkeeping obligations.

For more information related to this topic, check out our recent blog post on Regulation Best Interest.

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