Firms are employing diverse approaches to comply with the Regulation Best Interest rule and the new Form CRS before the June 30 implementation date, according to a review FINRA conducted on Reg BI preparedness at some of its member firms. The oversight group found firms have established project teams, working groups, time lines and training initiatives to ensure they’re prepared.
FINRA began conducting the assessments in late 2019 and continued into the early part of this year, according to the regulatory agency.
“Those assessments were not undertaken with the purpose of making findings of anticipated violations of Reg BI or Form CRS, but rather as a helpful dialogue with firms about their ongoing efforts and potential challenges,” the report read.
FINRA found that many firms instituted committees to oversee changes needed to comply with the rules, even if they consisted only of a small number of staff. Those teams typically approached the project by focusing efforts on the four obligations embedded in Reg BI, which include disclosure, care, conflict of interest and compliance.
Some firms developed a feedback process to consistently assess whether they were on track, and designated certain individuals within firms to conduct periodic meetings to make sure teams were delivering on what was necessary.
With documentation so important, FINRA found that many firms kept an inventory of changes they had made, contrasting obligations under Reg BI and weighing them against the firms’ current compliance policies. FINRA also found firms that had updated policies and procedures in preparation for the Department of Labor Fiduciary Rule (which was later vacated in federal court) determined ways to repurpose some of those efforts for Reg BI.
To address conflicts of interest, some firms created “logs” of conflicts, using automated tools to track and document new and existing issues. Some firms also created conflicts committees that would judge potential conflicts of interest if a firm began selling a new product or service. Additionally, some firms created alerts or limits on products, reducing the selection of investment products available for advisors, or put greater restrictions on what could be sold by less experienced advisors. In some cases, firms developed “product menus” that would be organized by the level of risk that a particular product or service would conflict with a client's best interest.
In preparing for the Form CRS, FINRA found that some firms had created multiple drafts, focused on meeting size and accessibility requirements, as well as determining when Form CRS delivery would be more appropriate for a hard copy or electronic delivery.
FINRA clarified that the actions detailed in the review should not be considered requirements for firms to be in compliance (nor should firms consider themselves in compliance just because they'd initiated the practices included in the review). Rather, the intention is to give firms a kind of benchmark to understand how other firms are working toward compliance and to get a clear sense of the steps involved.
Last week, SEC Chairman Jay Clayton announced that the compliance date for Reg BI and Form CRS would remain unchanged, noting that firms had nearly a year since the rule was passed to attain compliance. However, the SEC subsequently released risk alerts detailing examinations priorities, noting that the commission would be looking for “good faith” efforts to meet compliance, which may be all the more important in light of the tumult of the spread of COVID-19 and its economic impact.
