The U.S. Securities and Exchange Commission (SEC) will soon begin enforcing its Regulation Best Interest (Reg BI) rulemaking package, despite the operational challenges posed by the coronavirus pandemic.
Reg BI is set to take full effect on June 30, and firms should already be well on their way toward establishing compliance processes and procedures. One critical component of the regulation is the customer relationship summary form, dubbed “Form CRS” for short, through which registered firms must provide all new and existing clients with detailed information about their products, fees, conflicts of interest, disciplinary history and more. As part of the SEC’s move to provide investors with greater transparency, firms will be required to create the form, track when it is delivered to clients, record when it is changed and maintain a detailed history of its versions.
To help firms with the complex implementation and ongoing management of Form CRS, Pershing recently launched two new solutions to its platform. As Rob Cirrotti, managing director of global strategy and product management at Pershing, tells PLANADVISER, the first is essentially an end-to-end Form CRS solution for firms working with the Pershing platform.
“The end-to-end solution supports the full lifecycle of Form CRS, including creation, delivery, tracking and reporting,” he explains. “It also provides the ability to integrate form delivery into the client onboarding process so that firms can capture and store generation dates automatically.”
The second solution, also used for tracking and reporting on Form CRS, can be used by firms that use a different platform to deliver Form CRS. Pershing’s service will add an extra layer of visibility by tracking and storing generation dates and providing “a robust suite of reporting tools.”
Stepping back and reflecting on the advisory and brokerage industry’s progress on preparing for Reg BI and Form CRS, Cirrotti says it is something of a mixed bag.
“As is commonly the case with these big regulatory changes, individual firms’ preparedness falls across a broad spectrum,” he says. “Many firms had previously made big process and compensation changes related to the Department of Labor [DOL]’s now-defunct fiduciary rule expansion. A lot of these firms have simply left these processes and procedures in pace, and so complying with Reg BI has not been a huge lift for them.”
On the other hand are the many firms that, as Cirrotti puts it, were grateful to see the courts overturn the Department of Labor’s fiduciary rule expansion in 2018. Such firms may not have to fully rethink their product sets or business processes, but they may not savor the fact that they will have to disclose potential conflicts of interest in their Form CRS filings.
“Those firms are having a harder time as the June 30 effective date approaches,” Cirrotti says. “Part of the challenge is that Reg BI is not necessarily as prescriptive as the Department of Labor’s rulemaking was, so it’s a little less clear how to proceed to achieve compliance.”
Cirrotti says the coronavirus pandemic is making the job somewhat more difficult, mainly because the training of staff is an important part of Reg BI compliance. Remote learning can be helpful, he says, but many firms would prefer to do in-person training and planning.
“With everyone working virtually, it’s made the task that much more difficult, and many firms have actually had to change their compliance processes and procedures to reflect the role of digital and remote work,” he observes.
In related commentary shared with PLANADVISER, Paul DiBlasi, product development lead at Mediant, a communication and disclosure technology firm that works with brokers, agrees that partnerships are a great way for financial services firms to stay on top of their Form CRS requirements.
“Do-it-yourself distribution of your customer relationship summary may appear simple, but it’s operationally complex,” DiBlasi warns. “The SEC acknowledges this in its April 7 risk alert, which states it will focus its exams on the operational effectiveness of a broker’s procedures, including the process of delivering a Form CRS. The SEC will begin conducting its exams this year. Any break in a firm’s Form CRS distribution process can cause reputational damage, fines and lost business.”
DiBlasi says the complexity of Form CRS delivery comes from firms having to support multiple distribution channels, provide proof of delivery and maintain detailed records.
“The SEC recommends that Form CRS distribution mirror how each investor requested information about the firm, while preserving investors’ rights to choose the channel they prefer—paper or electronic,” he notes. “When mailing Form CRS, brokers can send it by itself or include it in a package of documents, but it must be the first document in the package. If delivery is electronic, it must be presented ‘prominently’ as a direct link or in the body of an email or message and must be ‘easily accessible’ for investors. Proof of delivery is required regardless of the distribution method.”
DiBlasi also points out that a key challenge for registered firms is that the “access equals delivery” rule does not apply. Evidence to show delivery—and consent to electronic delivery—is required.
“Believe it or not, your initial Form CRS delivery—the one you are working on now—is the simplest one you will do because you are sending the same document to every client by the same date,” he says. “However, just like developing a website, Form CRS delivery gets more complicated over time. For example, the ad hoc delivery of Form CRS increases operational, regulatory and business risks. Why? First, the recipients are different. Instead of blasting Form CRS to all clients, it needs to be sent just to specific clients and prospects. Second, and most critical, are the activity-based triggers that require a Form CRS to be sent.”
For existing clients, these triggers include recommending an investor roll over assets from a retirement account, opening a new account that is different from the client’s existing accounts, or providing a new brokerage service or investment. For prospects, the triggers include recommending a type of account, i.e., brokerage or advisory; opening an account for an investor; and placing an order for an investor.
“Capturing these unpredictable activities is what makes ad hoc delivery risky,” DiBlasi says.