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SEC (OCIE) Issues Risk Alerts Concerning Reg. BI

The SEC’s Office of Compliance Inspection and Examinations (OCIE) issued two risk alerts relating to Regulation Best Interest (Reg. BI). The two alerts summarize how future OCIE examinations will focus on compliance with Reg. BI and Form CRS. The Director of OCIE, Pete Driscoll, has stated that these are “critical to the protection of Main Street Investors and we feel it is important to share our concerns for initial examinations to help firms assess their preparedness as the June 30, 2020, compliance date nears.” Driscoll went on to state that OCIE would also focus on whether firms have made a good faith effort to comply with Reg. BI. Accordingly, a summary of each alert is below:

Examinations that Focus on Compliance with Reg. BI

OCIE will focus on four “component obligations” underlying Reg. BI.  These obligations are:

  1. Disclosure Obligation – a full and fair disclosure of all material facts relating to the scope of the relationship with retail customers, as well as all material facts relating to conflicts of interest related to a recommendation.
  2. Care Obligation – the exercise of reasonable due diligence, care and skill when making a recommendation, and requires consideration of the customer’s investment profile as well as the risks, rewards and costs associated with the recommendation.
  3. Conflict of Interest Obligation – the establishment, maintenance and enforcement of written policies and procedures to address conflicts of interest with a recommendation, including how do the policies and procedures identify, assess and disclose any conflict.
  4. Compliance Obligation – the establishment, maintenance and enforcement of written policies and procedures reasonably designed to achieve compliance with Reg. BI as a whole, including training, evaluation, controls, remediation of non-compliance and periodic review of the systems in place.

Examinations that Focus on Compliance with Form CRS

OCIE may focus on the following areas of examinations of Form CRS:

  1. Delivery and Filing – has the firm filed its relationship summary, and any amendments; is it posted on the firm’s website; is the relationship summary delivered to investors; and review of the firm’s policies and procedures regarding delivery.
  2. Content – does the relationship summary contain all required information that is true and accurate; and that it does not omit any material facts necessary to make the required disclosure, in light of the circumstances under which it is made, not misleading. 
  3. Formatting – is it in the required format, with particular wording where required, it uses text features where required, and is written in plain English.
  4. Updates – does the firm timely update its relationship summary after the information becomes materially inaccurate, whether any updates are timely communicated to investors, and how does the firm highlight the changes for investors. 
  5. Recordkeeping – staff will likely review related to the delivery of the relationship summary to investors and the policies and procedures that record compliance of and delivery of the relationship summary.

By issuing these alerts now, the SEC makes clear the deadline for compliance with Reg. BI remains June 30, 2020, and all firms are on notice of the focus of OCIE in future examinations. Each of the alerts can be seen here and here

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Author

David L. Ward is a Mintz attorney whose practice includes financial services regulatory matters, internal investigations, and securities-related litigation in state and federal courts. He represents financial services clients before the US Department of Justice, SEC, FINRA, and other regulators.