For Investment Advisers and Broker Dealers
Reg BI and Form CRS are here! Now what? After 391 long days of hand wringing, countless meetings, never-ending scenario-based questions, revisions, and the US Court of Appeals for the 2nd Circuit siding with the SEC to uphold the rule, Regulation Best Interest (“Reg BI”) and Form CRS are now effective! With filing complete, policies and procedures implemented, and training delivered, now what? What should firms do next? There really is no simple answer to this question, and each firm will answer it differently depending on the business they conduct and the requirements to which they are subject. Consider the following as you plan your next steps.
Day 1 – We did it! Did it work?
- Verify that your submission of Form CRS went through on WebCRD and/or IARD.
- Confirm that your website links for Form CRS and Reg BI disclosures are working correctly and that your new account opening process includes delivering a copy of Form CRS.
- Test to ensure that any automated methods of Form CRS notification or delivery are working as intended.
- After the initial delivery, confirm that your team understands when to re-deliver Form CRS.
Next 30 days – What next?
- If you identified any gaps in your policies and procedures while preparing for Form CRS and Reg BI, confirm that they have been appropriately addressed.
- Have you uncovered problems with the new process? If so, correct them now and address any potential violations those problems may have created.
- Consider sending additional communications to the field if questions are being raised that were not addressed in the initial training.
Beyond 30 days – Now we have some data to work with…let’s use it!
- Survey your financial professionals
- How is the process going for them?
- Do they have questions?
- What feedback are they receiving from customers?
- Have they identified any best practices that will benefit the rest of the firm?
- Are your financial professionals complying with the new policies and procedures?
- Check to see if appropriate notes are entered in client files or in a client relationship management (“CRM”) system.
- Based on your review, is additional training required?
- Ask whether designated supervisors understand their roles and are comfortable with what they should be doing.
- Ask your clearing firm about its role in your firm’s Form CRS and Reg BI compliance program.
- Have they provided evidence that they are performing as promised?
- Test a sample of the clearing firm’s production to ensure that all deliverables are taking place as intended.
- Establish a schedule for reviewing Form CRS and Reg BI disclosures to determine if any updates are required.
- Add a process to your compliance manual for updating Form CRS and Reg BI when a material change for the firm has occurred.
Going forward – Mitigating conflicts of interest
The best option for mitigating a conflict of interest is to eliminate it (whenever possible). Has the firm determined which newly or previously identified conflicts of interest can be eliminated?
- If so, are steps being taken to resolve the conflict of interest?
- If not, are all conflicts appropriately disclosed?
- Assess the firms processes and procedures for identifying and disclosing conflicts of interest.
- Are they functioning as intended? Or are changes required?
- If changes are required, has the change been addressed? If not, address it.
The list above is not exhaustive, and each firm should consider its specific circumstances. At minimum, processes must not only identify who is responsible for the oversight and testing of their new processes and procedures, but it should also establish the “how” and the “when” for these controls. Contributed by Doug MacKinnon, Senior Compliance Consultant, and Jaqueline M. Hummel, Partner and Managing Director.
Did you know that June 15th was World Elder Abuse Awareness Day (WEAAD)? The International Network for the Prevention of Elder Abuse and the World Health Organization at the United Nations created WEAAD to “promote a better understanding of abuse and neglect of older persons by raising awareness of the cultural, social, economic and demographic processes affecting elder abuse and neglect”. The rates of suspected financial exploitation of vulnerable persons and the regulatory spider-web of related state “report and hold” laws continue to grow. Broker dealer and investment adviser compliance teams are tasked with maintaining policies and procedures that remain current in the face of changing regulatory requirements and for providing training to educate their staffs on what to look for and how to handle suspected fraud. Below are several resources that can help:
Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.
For Investment Advisers
Form CRS and the Land of Oz…State considerations for Form CRS. It is July 2020, and despite COVID-19 restrictions and the investment advisory community operating from their business continuity plans – federally registered investment advisers with retail clients filed their initial Form CRS. While most SEC-registered RIAs will now turn their attention Form CRS delivery, state registered investment advisers wait for the other shoe to drop.
On the whole, state regulators have expressed general concern that both Reg BI for broker-dealers and the SEC’s Interpretation of Fiduciary Duty for investment advisers are not strong enough to protect investors. Massachusetts, for example, has finalized its own fiduciary duty standard for broker-dealers and agents which will begin to be enforced on September 1, 2020.
On the investment adviser front, most state securities regulators are considering whether they will require Form CRS to be completed and delivered by state investment advisers. Rhode Island stepped forward and issued a Securities Bulletin requiring Rhode Island state-registered investment advisers to file Form CRS through IARD by uploading it alongside Form ADV Part 2A by June 30, 2020. The Bulletin also states that it is a “best practice” as a fiduciary for advisers to deliver Form CRS to their retail clients. Hardin Compliance will monitor state law as it develops regarding fiduciary duty for broker-dealers and investment advisers. Contributed by Carolyn W. Mendelson, Senior Compliance Consultant.
West Virginia Enacts Senior Safe Legislation. West Virginia has joined twenty-nine other states, FINRA, and Congress by passing its own state financial exploitation statute to protect seniors and dependent adults from financial fraud and fraud attempts. West Virginia’s Protection of Eligible Adults from Financial Exploitation Act becomes effective on September 5, 2020. Similar to other “mandatory reporting” states, the West Virginia law:
- Requires broker-dealers and state investment advisers to investigate and, as needed, report reasonably suspected financial exploitation to the state’s Securities Commission and adult protective services.
- Permits firms to contact a trusted third party of the accountholder (so long as the trusted contact is not suspected as a perpetrator) about the suspected exploitation.
- Permits a firm to temporarily hold disbursements or transactions for the account holder so long as the firm reports the suspected fraud, advises the account holder, and continues the firm’s own investigation.
Click here for more details about this legislation and how to comply with it. Contributed by Carolyn W. Mendelson, Senior Compliance Consultant.
For Mutual Fund Managers
Temporary Relief extended for In-Person Board Meetings. This new order extends the time for relief from the in-person fund board meeting requirement until no earlier than December 31, 2020. The SEC’s original order was set to expire on August 15, 2020. Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.
Photo Credits: Photo by Nathan Edwards on Unsplash.