Remember when you were in college studying for tests and you’d look for one of the fraternity/sorority test files to help you prepare? Then you’d go into take the actual test and some of the questions were exactly the same and you knew the answer without even reading the entire question. Well, folks, it isn’t often that the SEC gives us a sneak peak behind the exam curtain to tell us exactly what they’re looking for when they schedule a regulatory examination, but guess what?! They just did that exact thing in one of their most recent OCIE Risk Alerts.
We all know the Reg BI mandate is barreling towards us with a June 30 deadline to file your Form CRS. Even the COVID-19 pandemic isn’t delaying this! This IS happening and is NOT a drill so you’d better be prepared.
There are four obligations of the Reg Best Interest and in prior blog posts, we’ve only discussed the Form CRS requirement. But it is what happens after that filing that will reviewed by OCIE (the SEC’s Office of Compliance Inspections and Examinations) and, likely, other self-regulatory organizations like FINRA. The four obligations are: Disclosure Obligation, Care Obligation, Conflict-of-Interest Obligation and Compliance Obligation.
You can read more about each obligation in the Risk Alert and firms should pay particular attention not only to the specific disclosures mandated by each obligation, but also the “document requests” that are noted for each one as well. Essentially, the SEC/OCIE is giving firms a “study guide” because this is exactly what is going to be asked/requested when they visit your office.
We’ve said in the past that we’ve heard assurances that as long as a firm is making a reasonable effort to comply with the Rule and its disclosure/delivery components, they’re more interested in helping firms with plugging holes and becoming fully compliant than they are about citing firms for deficiencies. We’re still relying on those communications but the key to this is that firms must be making a reasonable effort to comply. You can’t just have the Form CRS filed and mailed to existing clients, you have to update your policies/procedures which includes training, documentation, etc. And remember, even if you’re not affiliated with a broker-dealer and are RIA only, you still have the same obligations!
While that Risk Alert dealt with the overall Reg BI process, a second one focuses more on compliance with Form CRS. This Risk Alert not only delves into the content requirements but also the delivery of the form to both existing and new clients and the documentation of those deliveries. Remember we mentioned the “reasonable effort”? Your delivery efforts and the documentation must be detailed to show that the efforts you made to comply satisfy the “reasonableness test” where the examination team is concerned. Failure to meet this standard pretty much assures your firm a nice little findings letter and potential fine.
Compliance officers of firms should review these two documents and perform a self audit to determine their readiness. We are here to assist you if we can with any/all aspects of this process. Contact us with questions or let us know what we can do for you!