Securities Regulation Daily June 30 is compliance date for Reg BI, SEC Chair Clayton confirms
Tuesday, June 16, 2020

June 30 is compliance date for Reg BI, SEC Chair Clayton confirms

By Rodney F. Tonkovic, J.D.

The effects of the COVID-19 pandemic have strengthened the Chairman's view that Regulation BI and Form CRS should be implemented as soon as possible.

SEC Chairman Jay Clayton released a statement confirming that the compliance date for Regulation BI and Form CRS remains June 30, 2020. The regulation and form are intended to enhance the quality and transparency of relationships between broker-dealers and investment advisers and retail investors. Clayton noted that over the past twelve months firms have made "considerable progress" in adjusting their business practices plus policies and procedures, and otherwise preparing for the requirements of Regulation BI and Form CRS filing and delivery obligations.

Increased care may be needed. In his statement, Chairman Clayton noted that the compliance date arrives in the context of the continuing COVID-19 pandemic, which has had, and will continue to have, significant effects on markets and Main Street investors. But work being done across the Commission over the past months has strengthened Clayton's view that the effects of the pandemic weigh in favor of implementing the Regulation BI and Form CRS requirements as soon as possible.

The statement also noted that some risky and complex investments and strategies have been marketed to investors as responsive to the effects of COVID-19 and that some of these investments are simply fraudulent. Clayton emphasized that under the current conditions, there are certain areas that require special focus if they are included in a firm's recommendation or advice including, but not limited to rollovers and withdrawals from 401(k) and other plans; complex or risky products; COVID-related investments; and SPACs and other structured investment vehicles.

"As we proceed to the June 30 compliance date for Reg BI and Form CRS, and as the effects of the pandemic on our markets continue, the Commission will continue to focus on the interests of our Main Street investors, and we remain committed to enhancing the quality and transparency of their relationships with their financial professionals," Clayton said.

After June 30. In an earlier statement, Clayton said that following the compliance date, SEC examiners will be focusing on whether firms have made a good faith effort to implement compliance policies and procedures. A number of resources have been provided to assist firms in working toward understanding and implementing the new requirements, and a website for Main Street investors provides educational resources and other tools to assist them as they navigate Form CRS and research firms and financial professionals.

Regulation BI and Form CRS. The Commission adopted Regulation BI and Form CRS on June 5, 2019. The result of nearly two decades of grappling with developing standards of conduct for financial professionals, the package of reforms was designed to enhance 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 to a variety of investment services and products. Regulation BI states that when making a recommendation of a securities transaction or an investment strategy involving securities, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests, and includes specific obligations in the areas of disclosure, care, conflicts of interest, and compliance. Investment advisers and broker-dealers are also required to deliver a Form CRS relationship summary to retail investors at the beginning of their relationship summarizing information about services, fees, and costs; conflicts of interest; legal standard of conduct; and whether or not the firm and its financial professionals have a disciplinary history.

Controversial from the start, Regulation BI was adopted by a 3-1 vote, with Commissioner Jackson dissenting. Jackson, who retired in February 2020, noted, among other objections, the fact that the regulation does not define "best interest," and characterized the economic analysis contained in the final rule as "conclusory." Regulation BI has also been challenged in federal court by a group of states and by financial planners on grounds that its adoption violated the Administrative Procedure Act. The consolidated cases argue that the regulation exceeds the SEC's regulatory authority and falls short of what is required by the Dodd-Frank Act; for its part, the Commission maintains that it has broad discretionary authority to set a standard of conduct for broker-dealers. An opinion may be handed down by June 30.

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