In a somewhat stunning move in the midst of social distancing directives and state-wide stay-at-home orders in the vast majority of states in the country, the Securities and Exchange Commission (“SEC”) announced on April 2, 2020 that, despite the worldwide COVID-19 pandemic, it would not extend the June 30th deadline for subject financial services firms to implement policies and procedures under Regulation Best Interest (“Reg BI”) and roll out Customer Relationship Summary Forms (“Form CRS”).
SEC Chairman Jay Clayton released a statement in which he discussed various steps the SEC has taken in recent weeks to address the challenges broker-dealers and investment advisers are experiencing due to the pandemic. Among other things, Chairman Clayton referenced assistance the Commission has provided as member firms and registrants are adjusting to all-electronic trading platforms and implementing business continuity plans in compliance with federal, state and local health directives and guidance. He also discussed the Commission’s prior extensions of various deadlines impacting registrants (i.e. Form ADV filing and CAT implementation) and comment periods on various proposed actions that were otherwise expired, expiring, or set to expire, and the Commission’s previously announced modifications to exam procedures and pending administrative proceedings.
Despite these other extensions, modifications and accommodations, however, and his proclamation that the SEC intends to remain pragmatic and flexible during the pandemic, Chairman Clayton nonetheless opined that, regardless of the unknown trajectory of the pandemic and its continued unknown impact on business and the economy, Reg BI and Form CRS requirements will proceed as scheduled because “[a]t any time, and particularly in times of uncertainty, investment professionals should not put their interests ahead of the interests of their clients and customers. Reg BI codifies this fundamental principle. Investors should also know the services they are receiving and how they will be charged for those services. Form CRS requires that.” Explaining the decision, Chairman Clayton stated that the Commission “[b]elieve[s] firms with account relationships comprising a substantial majority of retail investor assets have made considerable progress in (1) adjusting their business practices, (2) supplementing and modifying their policies and procedures, and (3) otherwise aligning their operations and preparing for the requirements of Reg BI and the obligation to file and begin delivering Form CRS.” In recognition, however, of the extraordinary circumstances facing the country and the financial services industry, Chairman Clayton advised that:
[F]irms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances. To the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with us. 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.
To that end, while not extending the June 30th compliance deadline, Chairman Clayton stated that examiners will be focusing on whether firms have made good faith efforts to implement Reg BI, and will provide firms with opportunities to work with the Office of Compliance Inspections and Examinations (“OCIE”) to address compliance and other related matters. He also advised that OCIE will soon be issuing two risk alerts to provide broker-dealers with specific information about the scope and content of initial examinations for Reg BI and to provide broker-dealers and investment advisers with similar guidance regarding Form CRS.
The financial services lawyers at Reminger have spent the past ten months since the announcement of Reg BI assisting clients to prepare for its implementation and effective date, and have written previously on the regulation’s terms, conditions and requirements (see here). We stand ready to continue to do so, particularly in these trying times. Do not hesitate to contact us with any questions.