SEC guidance: Areas of focus for Reg BI

SEC Chairman Jay Clayton had said at the start of April that Reg BI wouldn’t be delayed amid the coronavirus pandemic, citing his belief that the rule is more important now than ever given the circumstances brought by the ongoing crisis. “Our work across the Commission over the past several months has strengthened my view that the effects of the COVID-19 pandemic weigh substantially in favor of implementing the Reg BI and Form CRS requirements as soon as practicable,” Clayton reiterated in Monday’s announcement.

Reg BI is intended to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations while preserving access (in terms of choice and cost) to a variety of investment services and products.

Under Reg BI, broker-dealers will be required “to act in the best interest of a retail customer” when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. It is designed to enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that broker-dealers may not put their financial interests ahead of the interests of a retail customer when making recommendations.

Form CRS, filed in conjunction with the new rule, requires SEC-registered investment advisers and SEC-registered broker-dealers to deliver to retail investors a brief customer or client relationship summary that provides information about the firm. The relationship summaries must then be filed with the SEC.

Clayton and his staff have engaged with broker-dealers, investment advisers, retail investors, other market participants, the Financial Industry Regulatory Authority, and other regulatory partners regarding the implementation of Reg BI and Form CRS over the past 12 months. In an effort to provide further information to investors, the SEC has set up a new Website page with guidance for navigating Form CRS.

For broker-dealers and investment advisers, Clayton suggests the following should be areas of focus when giving recommendations to retail investors in accordance with Reg BI and the Investment Advisers Act:

• Rollovers and withdrawals from 401(k) and other plans;
• Complex or risky products;
• COVID-related investments; and
• Special purpose acquisition corporations (SPACs) and other structured investment vehicles.

Clayton in April noted firms should make good-faith efforts to ensure compliance with Reg BI by June 30, but if there are disruptions caused by the coronavirus affecting those efforts, they should engage with the SEC for support. The agency’s Office of Compliance Inspections and Examinations also issued two Risk Alerts to provide additional information and guidance regarding compliance examinations for the new rule.