Source: Securities and Exchange Commission
Oct. 26, 2020
Good afternoon and welcome to the SEC’s Staff Roundtable on Regulation Best Interest and Form CRS. We hope that this event provides useful information to broker-dealers and investment advisers in complying with these key regulatory enhancements. Staff from the Commission’s Division of Trading and Markets, Division of Investment Management and Office of Compliance Inspections and Examinations, together with staff from FINRA, will present some insights and feedback as we approach the four-month anniversary of the June 30 Reg BI and Form CRS compliance date.
The Commission adopted Regulation Best Interest, or Reg BI, and Form CRS to enhance significantly the quality and transparency of relationships between broker-dealers and investment advisers—together, “firms”—and retail investors. Reg BI and Form CRS, together with related interpretations adopted at the same time by the Commission, are designed to bring the legal requirements and mandated disclosures for firms serving retail investors in line with reasonable investor expectations. Collectively, they also are designed to preserve retail investor access—in terms of both choice and cost—to a variety of investment services and products, fostering healthy, transparent competition.
Reg BI establishes an enhanced standard of conduct that requires broker-dealers to act in the best interest of their retail customers, making it clear that they cannot place their own interests ahead of their retail customers’ interests. This standard applies when a broker-dealer recommends to a retail customer a securities transaction or investment strategy involving securities, including an account recommendation such as a retirement fund “rollover”. This standard is a substantial enhancement beyond broker-dealers’ traditional suitability obligations. Importantly, this standard of conduct cannot be satisfied through disclosure alone.
Form CRS is a brief relationship summary designed (1) to help a retail investor make informed choices, including about what type of relationship—brokerage, investment advisory or a combination of both—best suits her or his particular needs and circumstances and (2) to improve the dialogue between retail investors and investment professionals. All firms must provide to retail investors a relationship summary containing plain English disclosures on the same topics under standardized headings and in a prescribed order.
This format allows retail investors to more easily compare different firms’ services and relationships, fees, costs, conflicts of interest and other important information. The relationship summary also encourages retail investors to ask questions and highlights additional sources of information that retail investors may wish to consider. As compared to historic disclosures, which could be lengthy and difficult to parse through, the relationship summary is designed to allow retail investors to easily understand key information about a particular firm and to compare that firm to others.
So, to summarize, Reg BI codifies the fundamental principle that investment professionals should not put their interests ahead of the interests of their clients and customers. Form CRS enables investors to better understand the services they can receive and how they will be charged for those services.
Earlier this year, I indicated the importance of maintaining the June 30 compliance date during this year’s period of economic uncertainty. In particular, I believed that the significant benefits of Reg BI and Form CRS would be crucially important to Main Street investors as they sought to address the economic impacts of the COVID-19 pandemic and resulting market volatility. From my perspective, firms’ ongoing efforts to meet their new obligations are continuing to help address the needs and expectations of these Main Street investors. For example, and as I briefly touched on earlier, Reg BI applies expressly to account recommendations. For many investors, this type of recommendation can come at a critical point, including at retirement, and can have significant long-term impacts.
It is now clear that any such recommendation must only be made after an assessment of the risks, rewards and costs and the particular investor’s circumstances and objectives—a key component of Reg BI—in addition to the other three specific component requirements of Reg BI. Ultimately, such a recommendation must comply with the over-arching requirement that the recommendation be in the best interest of the retail customer and that the broker not place her or his interests ahead of the retail customer’s interest.
Since June 30, staff have been reviewing firms’ compliance efforts and believe that firms generally are, indeed, meeting their obligations. Review has progressed on two fronts. First, staff from the Office of Compliance Inspections and Examinations, or OCIE, have been conducting initial examinations after the compliance date. Initial examinations of Reg BI and Form CRS have focused on assessing whether firms have made good faith efforts to implement the requirements of both Reg BI and Form CRS. During each panel of this afternoon’s Roundtable, staff from OCIE will provide feedback and insights from those initial exams. They will be joined by staff from FINRA, who will offer thoughts as well from their initial exams of registered broker-dealers.
Second, staff from the Divisions of Trading and Markets and Investment Management, as part of the staff Standards of Conduct Implementation Committee, have been reviewing filings of Form CRS. They have reviewed relationship summaries from a cross-section of firms to assess compliance with the content and format requirements of Form CRS. The staff’s review so far has generally found that firms have made good efforts to meet the content and format requirements of Form CRS, and staff have seen good examples of simple, clear disclosures. At the same time, it is clear there are areas where compliance improvements are needed.
For example, staff have identified filings that may lack certain disclosures or could be clearer or otherwise improved. During the second panel of this afternoon’s Roundtable, staff from both Divisions will provide thoughts and feedback as a result of that initial review.
One point that staff will discuss was recently addressed in several new Frequently Asked Questions posted on the Commission’s website. During the review of Form CRS, staff observed some examples where firms did not provide required information in the Form CRS disciplinary history section. It is now even more apparent to me that, in the past, this information was not always being brought to the attention of retail investors as it should have been. This section of Form CRS is designed to provide important information to retail investors before they enter into a relationship with a financial professional by alerting them when the professional or the professional’s firm has disciplinary history they may want to research, review or discuss. I commend those—as well as the other FAQs—to those watching today’s Roundtable.
The FAQs are one way by which Commission staff continue to engage with firms, retail investors and other market participants, as well as FINRA, regarding the implementation of Form CRS. The Commission and staff have provided other resources for registrants as well. Those include a Spotlight Page on our website for relevant materials and Small Entity Compliance Guides.
I hope that today’s Roundtable is informative and can provide a useful window into the approach that staff from the Commission and from FINRA are taking as they assess the extent to which registrants are meeting their responsibilities under the new regulatory requirements. Thank you again to the audience for joining us. And thank you to the panelists for your time. I expect your contributions will help inform the efforts of market participants as they seek to meet the goals of Reg BI and Form CRS and to enhance the quality and transparency of their relationships with retail investors.
After all, that is what these new requirements are all about: improving the quality and transparency of firms’ relationships with retail investors.
 My remarks are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.
 In April, OCIE issued two Risk Alerts—one with respect to Reg BI and one with respect to Form CRS. These are available on the Commission’s website and lay out information about the scope and content of these initial examinations. See Office of Compliance Inspections and Examinations, “Risk Alert – Examinations that Focus on Compliance with Regulation Best Interest” (Apr. 7, 2020), available here; Office of Compliance Inspections and Examinations, “Risk Alert – Examinations that Focus on Compliance with Form CRS” (Apr. 7, 2020), available here.
 The Spotlight Page for Regulation Best Interest, Form CRS and Related Interpretations, available here, contains relevant materials, including releases, comment letters, speeches, press releases and transcripts. The Small Entity Compliance Guides are available here and include additional resources as well. In addition, questions regarding Form CRS may be directed to: IABDQuestions@sec.gov.