FINRA recently made available a video conference in which representatives of FINRA, the SEC, and two individuals from broker dealers gave an update on what they believed to be the current status of RegBI.
These are very rough notes. Contact me for further discussion.
Status:
Compliance Date is still June 30
Helpful Guides to Members:
RegBI spotlight page on SEC
Small firm compliance guide
FAQs- SEC continues to issue and update these on their site
4/7/20 – two risk alerts, one notably from OCIE, outlining what SEC will be looking for in early exams
REG BI topic page on FINRA
Primary Interest of Regulators:
That firms have entered into a Good faith attempt to implement the Rule.
Show that the firm is moving towards compliance.
Participants suggested:
That firms should “live and breathe the Rule”.
That work could be broken up into four work streams, mimicking four parts of Rule
Make sure that products are good investments for at least some clients.
Communicate constantly with Reps and make sure that they are prepared.
Train the front line (Reps)
Write sample CRS and modify up until the send date.
Training: reps will be on front line.
Here is how it will impact you.
Dialogue and interaction. One company’s training program included quiz so that reps had to pay attention.
Teach What, when, how.
Here’s the info and here’s how you will be impacted-
Many very good panel discussions are still on line on the regulator web sites. Make use of them. Also make use of the OCIE Risk Alert- it’s a guide to what they will be looking for.
Basics:
When does RegBi apply?
When there is a recommendation.
Use the fact and circumstances test
Action/applies to HOLD recommendations
Is it a retail customer?
Applies any recommendation to natural person or a representative of that person. Yes, it applies to limited purpose broker dealers if they are making a recommendation.
High net worth, accredited investor still applies.
Caution Area: “we only do institutional business”- this may not be a good way to think about your accounts- they may be eligible even though they were previously thought of as “accredited” institutional accounts.
What if you have issues in implementing??
If you have issues with the pandemic, staff encourages firms to contact and work with regulator. Don’t be afraid to contact a regulator- if not comfortable coming in direct, use an industry association or counsel.
Regarding FORM CRS:
Form CRS- are you preparing a combined or two page?
Participants on the webinar both at first chose to do separate BD and IA , and then combined them. Most likely going to go with the combined version- SEC points in that direction. Also this will make sure that no information is left out or falls through the cracks.
Does an insert or post card suffice?
NO! Pretty clear that access=delivery is not sufficient.
When a BD has reps that are un-affiliated?
Each firm has its own delivery obligations. Perhaps both would be delivering.
Per one participant, the firm’s clearing firm will deliver the CRS in the July statement- and fulfill the 30 day requirement. They have consent email addresses in some case, but not all- so they will be doing a large mailing
Another participant says they will be doing a mailing, large, to existing clients, and expect to time it so that it is around the June 30 timing.
Every customer will get on or before June 30
Ongoing deliver: Repeat delivery- watch for certain events that trigger another CRS- (rollover, other examples). How do you determine when to re-deliver?
The SEC is working on information release on what might trigger another CRS.
REGBI has its own disclosures
The CRS may be the simple part of this, compared to other requirements of Reg BI
Use Layering- similar to IA part 2A – where is the money coming from, this is what you would want to know if you were an investor, direct the client towards that
One participant created a broker dealer brochure- 14-16 pages, layered disclosures, conflicts,
Layered disclosure
Use of the term advisor or adviser- capacity has to be disclosed- you can’t use the word unless very limited exceptions. An ap supervised by an IA would be ok, (maybe).
If a firm addresses this by having the rep sit for the 65, what is the SEC response to whether there is relief from the rule given that reps cannot currently sit for the exam.
SEC working on a response to this.
CARE OBLIGATION: looks like suitability with enhancements. What are the practical ways to shift from suitability to higher care standard?
Care- identify when events occurred:
Establishment of account
Funding of account
Transactions within account
Withdrawals from account
Step b would be looking at those items and adds costs, alternatives, transaction within accounts, complex products, variable annuity. Enhancing existing pre-approval. Look at post-transaction reviews and if an alert goes off, make sure that documents done and
One participant recommended slowing down the investment process and make sure that the client has a chance to ask questions and understand. Agent should come up with a reason for making the recommendation and it will be documented.
WSPs will be adjusted for ensuring that consideration of cost.
WSPs will be revisited in late May, June to look for additional needed revisions.
Overdeliver- have a CRS in hand every time. Don’t just stop at the rule.
Continued opportunity for improvement. Ever evolving. Use the enforcement actions of FINRA to learn.
One participant hopes to be able to share documents with other firms as a method of improvement.