The June 30, 2020 compliance date for Regulation Best Interest (Reg BI) and Form CRS will not be extended, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton announced earlier this month.[1] To the extent that a firm is unable to meet these compliance dates due to disruptions caused by COVID-19, the firm should engage with the SEC directly. Chairman Clayton indicated that he expects the SEC and its staff “will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in [SEC] examination and enforcement efforts.”[2] Indeed, the SEC Office of Compliance Inspections and Examinations (OCIE) has indicated it is willing to work with firms to address issues that may arise due to COVID-19 in its risk alerts addressing these compliance dates (discussed below).
Compliance Obligations
Investment advisers that offer services to retail investors will need to file a customer or client relationship summary via Form CRS (as Form ADV Part 3) electronically through the Investment Adviser Registration Depository (IARD) and deliver a copy of Form CRS to each retail investor. For the purpose of Form CRS, “retail investor” is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.”[3] This includes both high-net-worth and non-high-net-worth individual clients. However, investment advisers whose only clients are institutional clients, such as investment companies, pooled investment vehicles, and pension or profit-sharing plans, will not need to file Form CRS. Therefore, an adviser that only advises hedge funds, private equity funds, or venture capital funds will not need to file Form CRS.
Broker-dealers who offer services to retail investors (as defined above) will also be required to file Form CRS electronically through the Central Registration Depository (Web CRD®) and deliver a copy of Form CRS to each retail investor. In addition, broker-dealers and their associated persons must comply with the new standard of conduct outlined in Reg BI when making recommendations to a retail customer. For the purposes of Reg BI, a “retail customer” is defined as “a natural person, or the legal representative of such natural person, who: (A) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (B) uses the recommendation primarily for personal, family, or household purposes.”[4]
OCIE Risk Alerts
OCIE issued a risk alert to provide firms with information about the scope and content of initial examinations after the compliance date for Reg BI[5] and another risk alert for Form CRS.[6] With respect to Reg BI, OCIE will begin examining broker-dealers to assess implementation. Initial examinations will likely occur during the first year after the compliance date, and will primarily evaluate whether firms have established policies and procedures reasonably designed to achieve compliance with Reg BI and whether firms have made reasonable progress in implementing such policies and procedures. With respect to Form CRS, OCIE will begin examining broker-dealers and investment advisers to assess whether firms have made a good-faith effort to implement Form CRS. In both risk alerts, OCIE emphasized that it “stands ready to work with firms . . . on issues that may arise in the course of examinations and understands that the coronavirus disease 2019 (COVID-19) has created challenges for firms.”
Additional Resources
The SEC has published online FAQs[7] and a small entity compliance guide[8] with more information on Reg BI and the compliance obligations thereunder. The SEC has also published FAQs[9] and a small entity compliance guide[10] with similar information concerning Form CRS.
