Scarinci Hollenbeck, LLC
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201-896-4100 info@sh-law.comFirm Insights
Author: Scarinci Hollenbeck, LLC
Date: November 8, 2019
The Firm
201-896-4100 info@sh-law.comRegulation Best Interest (Reg BI) took effect on September 10, 2019, with a compliance effective date of June 30, 2020. Given the breadth of the changes required under Reg BI, advisory and brokerage firms should begin their preparations for compliance now.
To assist regulated entities, both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently published ‘guidance notices’. These notices provide a useful starting place for firms to begin their analysis of what new policies and procedures will need to be implemented or revise existing ones to comply with Reg BI and Form CRS.
Reg BI establishes a new “best interest” (“BI”) standard of conduct under the Securities Exchange Act of 1934 (Exchange Act) for broker-dealers and their associated persons when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. Under this standard, a broker-dealer and its associated persons must act in the “BI” of the retail customer at the time the recommendation is made, without putting the financial or other interests of the firm ahead of the retail customer.
A broker-dealer discharges this BI duty by complying with four specific obligations:
Both investment advisers and broker-dealers will be required to provide retail investors a form summarizing their relationship. This standardized, short-form, known as Form CRS (Customer/Client Relationship Summary), is intended to inform retail investors about: (i) the types of client and customer relationships and services the firm offers; (ii) the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm.
On September 9, the SEC published a Small Entity Compliance Guide for Regulation Best Interest. The compliance guide is divided into 11 questions and answers about the new rule. Topics include what recommendations are covered; who is considered a retail customer; and what each of the new obligations requires.
The SEC also published a Small Entity Compliance Guide for the Form CRS Relationship Summary and Amendments to Form ADV. The guide is divided into 13 questions and answers. The guide addresses the compliance requirements for Form CRS and amended Form ADV, including formatting, updating, and filing the required relationship summary.
FINRA has also issued its own guidance in the form of a Reg BI “checklist” to help broker-dealers comply with Reg BI. The Regulation Best Interest and Form CRS Checklist (Checklist) distills Reg BI and Form CRS into a more easily-digestible format. FINRA’s 20 Reg BI Checklist items are:
By June 30, 2020, registered broker-dealers must begin complying with Regulation Best Interest. In addition, broker-dealers and investment advisers registered with the SEC will be required to prepare, deliver, and file Form CRS.
If you have any questions or if you would like to discuss the matter further, please contact me, Paul A. Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
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