Compliance December 2, 2019

Can Dual-Registered Firms Provide More Than One SEC Form CRS?

The SEC tackles this question and others in a new FAQ publication about the Regulation Best Interest rulemaking package, as does Morningstar in a new paper that examines the regulation’s impact on specific business models.

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A new frequently asked questions (FAQ) document published by the U.S. Securities and Exchange Commission (SEC) presents some important information about the Regulation Best Interest rulemaking package and the related Customer Relationship Summary Form (Form CRS).

The SEC warns that the FAQ responses simply represent the views of the staff of the Division of Investment Management and the Division of Trading and Markets, noting that the FAQ is “not a rule, regulation, or statement of the Commission.” Still, the document may be helpful as firms work to meet the requirements of Reg BI ahead of its important 2020 deadlines.

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The first question asks whether a firm that provides multiple tiers of service to retail investors can prepare and deliver three different Forms CRS—one for each type of service that it offers. The SEC’s response here is a direct “No.”

“Each broker/dealer or investment adviser must only prepare one relationship summary summarizing all of the principal relationships and services it offers to retail investors,” the FAQ document states. “For example, if an investment adviser offers a wrap fee program, advice to participants in a 401(k) plan, and discretionary asset management for high net worth clients, the investment adviser would be required to prepare a single relationship summary describing all of the firm’s different services.”

Similarly, the SEC says, if a broker/dealer offers a range of brokerage services to retail investors—such as self-directed, full-service, and employer-sponsored retirement plan options—the broker/dealer would be required to prepare a single relationship summary describing all of the firm’s different services.

The same is true for dual-registered firms, which also must prepare a single relationship summary addressing both brokerage and investment advisory services.

According to the FAQ, in the staff’s view, a firm may deliver the relationship summary separately, in a bulk delivery to clients, or as part of the delivery of information that the firm already provides, such as the annual Form ADV update, account statements or other periodic reports.

“A firm must initially deliver its relationship summary to each of its existing clients and customers who are retail investors within 30 days after the date by which it is first required to electronically file its relationship summary with the SEC,” the document notes. “If the relationship summary is delivered in paper format as part of a package of documents, a firm must ensure that the relationship summary is the first among any documents that are delivered at that time. If the relationship summary is delivered electronically, it must be presented prominently in the electronic medium, for example, as a direct link or in the body of an email or message, and must be easily accessible for retail investors.”

Another FAQ question is more technical, asking how firms can create machine readable headings to comply with General Instruction 7.A.(i) to Form CRS. As a general matter, the document advises firms to consult with the specifications and instructions provided by the software provider of the application being used to create the PDF of the firm’s relationship summary. The FAQ specifically includes guidance for users of Microsoft Word and Adobe.

Reg BI’s Impact on Different Business Models

After hearing many similar questions from its clients and in the financial media, Morningstar has also published a new detailed analysis of Regulation Best Interest, “Regulation Best Interest Meets Opaque Practices,” focused on the question of how Reg BI may or may not impact the use of revenue sharing among advisers and brokers.

“Not all revenue-sharing payments create conflicts, and we built a taxonomy of revenue-sharing payments from the least to most likely to create conflicts of interest: educational expenses, platform fees; data fees; select lists; and payments based on sales, assets, or accounts,” the paper suggests. “Critically, the degree to which any revenue-sharing arrangement creates a conflict depends on the magnitude of the payments and the degree to which the payments are directly tied to sales.”

Morningstar’s analysis posits that, despite “historically low levels of scrutiny,” recent regulatory developments may force changes in revenue sharing as brokers work to mitigate conflicts of interest in order to comply with Regulation Best Interest.

“Brokers now have an obligation to mitigate and disclose the kinds of conflicts that revenue sharing can create, and we expect certain kinds of arrangements to get increasing scrutiny as the regulation goes into force,” Morningstar warns. “We recommend that market participants and policymakers use our taxonomy when evaluating revenue-sharing arrangements for the level of conflict they create. We also recommend that the SEC collect data on revenue sharing in a structured, standardized format to facilitate further research in this area.”

The analysis argues that conflicts “embedded in popular share classes” are often opaque and harder to evaluate than other conflicts of interest.

“Load sharing creates conflicts of interest when brokers have incentives to recommend one fund over another,” Morningstar finds. “The degree to which revenue sharing creates conflicts of interest depends on the magnitude of the payments and the degree to which they are tied to sales. Regulation Best Interest may force changes in revenue-sharing practices as brokers mitigate conflicts of interest. Brokers traditionally followed a suitability standard, which did not impose much scrutiny on revenue sharing. Regulation Best Interest strengthened the standard of conduct for brokers and is likely to affect revenue-sharing practices.”

As Morningstar recounts, prior to Regulation Best Interest, brokers were not expected to put their clients’ interests ahead of their own.

“Consequently, as long as a recommendation was suitable, it did not have to be in the client’s best interest. A broker could have had access to investments that were better suited to the client’s needs and not recommended them because of a conflict of interest, for example, financial incentives tied to one product over another—and that would not interfere with their fiduciary duty,” the paper explains. “Regulation Best Interest, which the SEC finalized in June of this year, altered the landscape for standards of conduct. Brokers now have to act in their clients’ best interest, a higher standard than the previous suitability requirement. They must also eliminate or disclose and mitigate material conflicts of interest.”

Also notable, according to the paper, is that brokers are explicitly required to consider cost as a factor under Regulation Best Interest, while such a requirement was not as explicit under the suitability rules.

“Regulation Best Interest’s standard, however, is still not as rigorous as the fiduciary standard under ERISA, which is what would have applied to brokers if the DOL fiduciary rule had remained in effect,” the paper concludes.

Client Service December 2, 2019

The Positive Impact of Claiming Social Security Later

The Center for Retirement Research says the reduction for claiming early is currently too large while the increase for claiming late is about right.

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The most popular age for claiming Social Security benefits is age 62, the first year in which the benefits are available to people, according to the Center for Retirement Research at Boston College.

Thirty-five percent of men and 39% of women claim their benefits at that age. A mere 23% of men claim their Social Security benefit at full retirement age, and just 16% of women wait until that time.

The problem with that, according to a study by the Center, is that retirees would get substantially more in their Social Security check if they waited until age 70 to sign up.

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Another problem is that the Center also found for the average worker, the reduction for claiming early is currently too large while the increase for claiming late is about right. Higher earners—who live longer and claim later—get a really good deal under the current system.

In a separate study, the Center for Retirement Research analyzed the actuarial impact of claiming benefits early versus waiting—which also underscored the downside of claiming early. The Center explains that the reason why benefits are reduced for those retiring earlier and increased for those retiring later “has always been to ensure that the costs to the system, for workers with average life expectancy, were not affected by the age at which they claimed. To keep the costs equal, benefits claimed early need to be reduced to reflect the increase in years of benefit receipt, and benefits claimed later need to be increased to reflect the fewer years.”

The Center concludes that given the increase in life expectancy and the decline in interest rates, both factors “would argue for smaller reductions for early claiming.” And, it says, “If the delayed retirement credit were based on the life expectancy of those who use it, it should be smaller than the current 8% to equalize the cost of early versus late claiming.”

Encouraging employees to claim later

In the more recent study, researchers tried various ways to encourage workers between the ages of 40 and 61 to wait to claim benefits. Two of the most successful tests asked participants to engage in a little self-reflection about the impact of choosing when to start receiving their Social Security benefit. These approaches differed from others that focused on merely providing financial information to people.


In both of the two most successful tests, workers were shown a table listing how much more they would receive from Social Security if they waited past age 62. In the first test, participants were asked to list their own reasons for how delaying would help them personally. They were then asked to list the reasons why they could benefit from starting their benefits earlier.

This group reported that they would sign up 10 months later than the control group, which did not engage in the test.

In the second test, participants were asked to think about the implications of living to a very old age, such as large medical bills and depleted retirement accounts. This group said they would delay the date for claiming benefits by six months.

The Center for Retirement Research says the way Social Security choices are presented to people, particularly in a personal sense, matters.

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