SEC’s Reg BI Roundtable Round-up

Ulmer & Berne LLP

On October 26, the SEC hosted a roundtable discussion during which the SEC and FINRA shared some of their observations about how firms are doing implementing Regulation Best Interest.  If you missed the live presentation, it was recorded and should be available sometime in the future on the SEC’s website.

The discussion covered a lot of topics and, in some instances, simply directed firms to the FAQs and guidance released to date.  But, in a few instances, there were glimpses of what the regulators liked and what troubled them as they conducted these reviews.   Here are a few of the highlights where we learned what pleased and displeased the regulators:

Reg BI training.  The regulators are seeing a lot of firms sharing documents with their reps that explain what Reg BI is, what their procedural changes and requirements are, etc.

The Regulators are pleased with firms that:

  • Added a “live” (electronic, of course, given the pandemic) training element.
  • Included in their training specific guidance for reps on how they fulfil the various obligations owed under the regulation. So, for example, instead of merely repeating the requirement reps must act in the customers’ best interest when recommending a specific account type, the regulators were pleased by firms who go on to train reps on how to perform that analysis (and how to memorialize it).
  • Conduct ongoing testing to ensure that the rep’s understanding of his or her obligations has “stuck.”
  • Write up reps who do not complete their training on time.

The Regulators are displeased with firms that:

  • Had not started training or started it long after Reg BI’s implementation date.
  • Merely distributed rule updates as training.

Care Obligation.  The care obligation requires reasonable diligence and care when making a recommendation including knowledge of risks, rewards, costs, and that the rep has a reasonable basis to believe that the recommendation is in the customers’ best interest.  This analysis specifically requires that the rep consider “reasonably available alternatives” to the product or strategy the rep intends to recommend.

The Regulators are pleased with firms that:

  • Had developed tools to assess “alternative” recommendations.
  • Conducted up front review of certain products prior to making them available.
  • Evaluate their existing customer records and the manner in which they collect customer information to ensure they are properly collecting and preserving information about the customers’ risk, experience, etc.
  • Requiring reps to include comments around each recommendation so that supervisors can review compliance with care obligation. (The regulators acknowledged that there was no requirement to document this process, but recommended firms do so, especially if it involves an unusual product or if the recommendation seems to be a poor fit for the customer, in case the regulators come in and ask about it).

The Regulators are displeased with firms that:

  • Had procedures that failed to distinguish between the Rule 2111 suitability and the best interest standard OR had simply added Reg BI language to existing procedures without “harmonizing” Reg BI and the Suitability Rule.
  • Required reps to certify that they had performed the care analysis, but did not require the reps to explain what the analysis was.

Form CRS.  The Regulators pushed firms to review the guidance and FAQs they had published about Form CRS and its requirements.

The Regulators are pleased with firms that:

  • Avoided legalese and disclaimers. The document should be in plain English.  (I think one of the Panelists suggested that it should be written for a person who reads at an 8th grade reading level, but I’m not sure I caught that correctly and there was no rewind button!)
  • Used charts, graphics, and exciting fonts to highlight items.
  • Made sure conversation starters were visible.
  • Did not “overload” the pages in dense text and, instead, used white space to draw the reader’s attention.
  • (for dual registrants) used side by side columns or boxes to illustrate the differences between brokerage and IA accounts.
  • Clearly described how and when fees were imposed.
  • Explained whether the firm monitors customer accounts and, if so, the frequency.

The Regulators are displeased with firms that:

  • Modified the conversation starters.
  • Used Form CRS as marketing material instead of a disclosure document.
  • Used Form CRS to explain how conflicts would be mitigated or to suggest they were rare/minimal by using words like “may.” (The Commission believes this downplays the conflicts, whereas the purpose of Form CRS is to highlight them).
  • Failed to disclose disciplinary history or incorrectly said no history existed when it did.
  • Provided “extraneous” language explaining disciplinary history.
  • Failed to state “yes” or “no” in response to the disciplinary history question or otherwise provided a vague response.
  • Provided only vague cost and fee descriptions and no discussion on how they are imposed.
  • Failed to provide a WRAP fee disclosure.
  • Modified the required headings.
  • Missed required sections of Form CRS.
  • Missed required headers.
  • Missed required conversation starters.
  • Failed to deliver the Form CRS.
  • Failed to record delivery (meaning delivery could not be verified).

Towards the end of the program, FINRA suggested that it may not necessarily agree with some of the firms that had concluded they were not required to file Form CRS at all.  FINRA seemed surprised by the number of firms that reached this conclusion.

I encourage everyone to find the archived program and watch it.  A lot of the information will be repetitive for anyone who has read the Rule, Form CRS and followed the subsequent guidance.  But it is interesting to hear about what other firms are doing (good or bad) and see which areas the regulators are most focused on – at least for the moment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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