What to Expect in an SEC Regulation Best Interest Inspection

Two new risk alerts published by the SEC provide broker/dealers and advisers with advance information about the expected scope and content of the initial examinations for compliance with Regulation Best Interest and Form CRS.

The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) has issued two new risk alerts aimed at helping advisers comply with the Regulation Best Interest (Reg BI) rulemaking package.

Reg BI is set to take full effect on June 30—a date that has been recently reconfirmed publicly by SEC Chairman Jay Clayton despite the ongoing coronavirus pandemic—and firms should already be well on their way toward establishing compliance processes and procedures. In these new risk alerts, the OCIE staff says, advisers and broker/dealers (B/Ds) subject to Reg BI can find important information about how their compliance will be assessed in the future.

The first risk alert specifically considers future OCIE examinations that focus on “compliance with Regulation Best Interest.” The OCIE says its initial examinations of Regulation Best Interest will focus on assessing whether broker/dealers “have made a good faith effort to implement policies and procedures reasonably designed to comply with Regulation Best Interest, including the operational effectiveness of broker/dealers’ policies and procedures.” 

The first risk alert emphasizes the following facts: “After the compliance date, OCIE will begin examinations to assess implementation of Regulation Best Interest. These initial examinations, which will likely occur during the first year after the compliance date, are designed primarily to evaluate whether firms have established policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.”

OCIE will also “evaluate whether firms have made reasonable progress in implementing those policies and procedures as necessary or appropriate, including making such modifications as may be necessary or appropriate, in light of information gained from the implementation process and other facts and circumstances.”

The text of the risk alert details some (but not all) of the areas OCIE staff will consider as they do this work. These include Reg BI’s new disclosure requirements, its new care obligations and the conflict of interest mitigation requirements.

The second risk alert is concerned with examinations related to the provision of newly required customer relationship summary forms for all brokerage and advisory clients, referred to by the SEC as “Form CRS.” Review in this area, the OCIE says, will focus on assessing “whether firms have made a good faith effort to implement Form CRS,” including reviewing the filing and posting of a firm’s relationship summary as well as its process for delivering the relationship summary to existing and new retail investors.

This alert explains that the OCIE staff will be reviewing firms’ methods of delivery and filing for the Form CRS—as well as the actual content and formatting of the deliverables.