Implementing Reg BI: What Advisors And Their Firms Need To Know

A little less than a year from now, advisors and their firms will be expected to be in compliance with all elements of the Securities and Exchange Commission’s Regulation Best Interest and its subsequent rules (some of which are already in effect, by the way).

The fiduciary governance experts at Stradley Ronon Stevens & Young said firms and advisors need to be well-informed and proactive to make sure they’re Reg BI-ready come next year because of the rule's many layers.

Reg BI’s Impact

The general care obligation in Reg BI requires that when a broker-dealer makes a recommendation, B-Ds must act in the customer’s best interest. B-Ds may not place their own interests ahead of the customer’s interests.

To be in compliance, a broker-dealer has to meet all four components specified in the regulation. Those components are obligations on disclosure, care, conflict of interest and compliance.

It’s with these four distinct obligations that firms and advisors will start to see the impact on their businesses.

Areas of Minimal Impact:

• Broad oversight of investment companies.
• The manner in which investment companies are regulated, managed and operated under the Investment Advisers Act of 1940.

Possible Affected Areas:

• Prospectus and shareholder communication disclosures.

Major Areas of Impact

• IRA Rollovers.
• Non-cash compensation (sales contests, promotions, bonuses, etc.).
• Inconsistent treatment of investors, stemming from proposed “retail investor” definition.
• Debate over acceptable sales compensation models.
• Brokers may become more hesitant to recommend small, active-managed funds over increased scrutiny.
• May discourage broker-dealers from recommending proprietary products.
• Continued migration to Investment advisor model.

“It seems like any kind of trends that started in the financial service industry prior to Reg BI will continue.”
-- Lawrence Stadulis, Stanley Ronon co-chair of fiduciary governance

Paper Trail

The experts at Stradley Ronon also outlined expectations and requirements that B-Ds and advisors will be expected to follow concerning disclosures like Form CRS.

Appearance: Form CRS will be two pages for broker-dealers and investment advisors. For dual-registrants the total length will be four pages.

The SEC did not specify paper size, font size or margin width in its final instructions for Form CRS, asking only for these qualities to be “reasonable.”

The Commission heavily encourages the use of graphics like charts, graphs, tables, etc. in Form CRS to help investors digest the information it contains. It also suggested that content could be “layered” through hyperlinks and QR codes.

Language: Firms will be required to respond to a predetermined set of topics in a specified order in Form CRS. However, the SEC has given firms room to use their own wording in responses.

There is a catch to firms being allowed to use their own wording, however. The responses cannot use legal jargon unless it is explained. This applies even if the firm believes an investor would be familiar with the terms used.

Delivery: For the sake of speed and paper, Form CRS can be delivered to new or prospective clients in the manner it was requested. For instance, if the request for Form CRS was received via email, it would be acceptable to return it the same way.

In addition to being available on the firm’s website, Form CRS will be accessible on investor.gov. When changes occur, it is the responsibility of the B/D or advisor to update the summary and resubmit it within 30 days. The changes will need to be communicated to clients within 60 days from the date of change.

Dual registrants will need to file Form CRS twice, once with Web CRD (Central Registration Depository) and the second with Investment Adviser Registration Depository.

Interpretation Of The Adviser Act

The SEC’s interpretation of the Investment Advisers Act of 1940 is effective immediately, not at the June 30, 2020, deadline like Reg BI and Form CRS.

“Folks should go back and examine their contracts and examine their procedures as well as examine their disclosure to make sure that all of those comport with the interpretive guidance.”
-- Alan Goldberg, Stradley Ronon partner

AdvisorNews Managing Editor Cassie Miller may be reached at [email protected]. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.