One week after the SEC adopted Regulation Best Interest and Form CRS, a Cincinnati roundtable hosted by Fort Washington Investment Advisors, Inc. Private Funds & Regulatory Compliance Manager Andre Rickman ran through early impressions of the new rules and their accompanying Interpretive Releases with a very interested group.
CSS Regulatory Compliance Expert Greg Hotaling opened discussion about the challenges of shareholder disclosure compliance and position limit monitoring, describing data management, the tracking of rules across the globe, and the creation of the necessary filing documents for each jurisdiction. Once a firm overcomes the challenge of organizing data, the next challenge is tracking each country’s rule set and then finally transforming the application of the data through the rule set into fileable reports, he told the group.
Participants also noted the need for a resource to track registration requirements in foreign jurisdictions.
The group returned to a discussion of Regulation BI and Form CRS led by CSS Executive Director Keith Marks, who stated a belief that rule makers have closed the gap between the standards of care applicable to broker-dealers and investment advisers. “To accomplish this, investment advisers must summarize information they currently provide to clients into another document in which broker-dealers will provide comparable summaries,” he said.
Regulation BI requires broker-dealers to adhere to a best interest standard of not placing their interests ahead of customer interests when providing advice to retail investors.
Broker-dealers will be required to adopt a four-step plan of disclosure, reasonable care, mitigation or elimination of conflicts of interest, and written policies and procedures to achieve compliance. The end result is more compliance, particularly for broker-dealers.
Form CRS, or Form ADV Part 3, will be the document that IAs and BDs will now have in common. To keep the documents similar for meaningful comparison, each document will have the same headings and be limited to two pages. Dual registrants may publish four pages. The deadline is June 30, 2020, and not before May 1, 2020. There are standard Form ADV client delivery requirements for providing the document to clients after being filed on the IAPD. When delivering Form CRS in paper, it must be the document on the top of the pile, according to one instruction.
The SEC published a supporting Interpretive Release titled “Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from Definition of Investment Adviser,” which included a list of limited types of discretion that are to be considered advice incidental to the primary business of effecting securities transactions – and therefore not subject to IA registration. Unlimited discretion is advisory, concluded the SEC.
The SEC also published “Commission Interpretation Regarding the Standard of Conduct for Investment Advisers.” This gave the SEC the opportunity to provide its clarity around the use of the word “may” in disclosures.
SEC Chair Jay Clayton seemed earnest when he opened the SEC’s June 5 meeting with the sentiment this may not be perfect but it protects broker-dealers while letting more information try to determine the market.
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