Insights | 05.06.20
Stressed Advisors Get Reg BI Resources But No Reprieve
The stunning statement by Securities and Exchange Commission (SEC) Chairman Jay Clayton came on April 2, at the height of the pandemic emergency: there would be no extension of the June 30 deadline for complying with Regulation Best Interest.
If the announcement had come one day earlier it might have been discarded as a cruel hoax. Once the sense of disbelief – that the agency could be so out-of-touch/unforgiving in such stressful times – had abated, it fell to compliance leaders to look ahead toward the clear path laid out in terms of precisely what will be expected.
For tucked within Clayton's statement, and in two SEC Risk Alert bulletins, was a message for the industry.
"Make a good-faith effort," said Ben Marzouk, an attorney with Washington, D.C.-based Eversheds Sutherland.
Large firms have the staff and resources to keep calm and carry on but many smaller firms are having a hard time keeping their businesses running in dicey markets while working remotely; some firms likely find themselves up against a deadline that probably can’t be met.
Regulators seem to be aware of this.
SEC: ‘Engage With Us’
"To the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19,
Including … efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with us," Clayton said in the statement. "I expect that the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts."
The sheer turbulence of these times, as well as Internal Revenue Service extensions and the fact that the SEC recently gave Registered Investment Adviser (RIA) firms extra time to submit their Form ADV documents all must have helped lead many in the industry to assume the compliance deadline for Reg BI would be put off. Others simply do not have an early-summer compliance deadline on their radar, immersed with bigger things.
Advisor: ‘Unnecessary Burden’
"I have some older clients who have died of COVID-19 and I am busy handling their affairs, and mourning them along with their families, so honestly the new Form CRS is not on my mind right now," one New York City area rep at a bank-owned brokerage said by email recently.
Firms are trying to get through each day, and not looking toward rule implementation at the end of June, said Sander Ressler, a compliance advisor to broker/dealers, speaking with Wealth Management.com.
“It’s an additional burden I think is unnecessary,” Ressler said.
But firms will get it done, he added. It just means that they are going to be scrambling.
But let’s say an advisory business doesn’t have their new Reg BI regime in order by June 30, what then? According to lawyers who have parsed recent Risk Alerts from the SEC’s Office of Compliance, Inspections and Examinations (OCIE), there is still time to keep pushing the ball up field provided a good-faith effort can be demonstrated – because it is merely that which will be probed. For example, an April 7th Risk Alert on Form CRS (one of two) from the OCIE said “initial [Form CRS] examinations will focus on assessing whether firms have made a good faith effort to implement Form CRS.”
Similar to the SEC Chairman, the OCIE telegraphed flexibility.
"OCIE stands ready to work with firms and our colleagues in the Division of Trading and Markets on issues that may arise in the course of examinations and understands that the coronavirus disease 2019 (COVID-19) has created challenges for firms."
At a Financial Industry Regulatory Authority (FINRA) conference in Washington, D.C. late last year, Emily Westerberg Russell, chief counsel in the SEC Division of Trading and Markets, stated publicly the new best-interest standard boils down to one word: “reasonableness.”
“Is there a reasonable basis to believe that the recommendation is [in the client’s] best interest based on the facts and circumstances at the time the recommendation is made?” Russell said.
Meeting compliance deadlines – documenting a process for documenting reasonable activity – requires more than just dedicated staffers working long hours. Technology upgrades cost money. Some firms might not have it to spend with pressures, from all directions, on revenue. However, most firms have already made these expenditures by now; and technology costs appear to be frontloaded in implementing the rule, according to a survey done by Deloitte & Touche on behalf of the Securities Industry and Financial Markets Association (SIFMA).
Some 48 firms participated in the SIFMA survey. Of those, 20 firms provided dollar amounts relating to Reg BI compliance outlays. The 20 firms committed an aggregate of about $114 million toward readiness efforts. Although costs associated with readiness varied greatly amongst survey participants, the median spend was $3 million.
FINRA, meanwhile, has shared some common practices the self-regulatory organization observed while conducting Reg BI preparedness-reviews.
HERE is a link to that FINRA resource.
The other April 7 OCIE Risk Alert, the one titled “Examinations that Focus on Compliance with Regulation Best Interest,” contained an appendix section with a list of information and document types that may be requested ahead of a site visit. It’s just a sample and not applicable to everyone, but a useful resource nonetheless. HERE is that bulletin.