While the SEC moved full force in adopting Regulation Best Interest and Form CRS, state regulators were fairly silent on what steps they would take pertaining to this topic. It seems the sleeping bear has awoken early this winter with the recent multi-state survey being sent to state-registered investment advisers. Many states are conducting a coordinated examination survey of registered firms and their business practices prior to implementation of Regulation Best Interest. The participating states have entered into an agreement to share with each other the results of the examination survey and any records otherwise obtained.
The survey, which is mandatory in many states, includes questions such as:
- What is the firm’s total number of retail customers,
- What is the firm’s revenue,
- Does the firm maintain E&O insurance,
- Use of the title of “advisor” or “adviser” in marketing materials, disclosures, customer agreements, websites, or as a job title on business cards or in any form of social media to describe itself or its registered agents/ representatives while operating in the capacity of a broker-dealer; and
- A swam of questions on the types of products offered to clients.
The survey asks a significant amount of questions related to product-specific guidelines and the training provided to staff when an adviser participates in the sale of annuities, non-traded REITS or private securities. The state regulators are curious about disclosure to clients, the timing of disclosure, any sales quotas related to products, etc. Importantly, the survey asks a significant amount of questions about the information gathered on investor profile forms or questionnaires, thus a good reminder to state-registered firms to be maintaining those type of documents.
Here’s a sampling of some questions from the survey:
- “In relation to the availability of lower-cost, suitable options outside the firm’s platform, please indicate whether it was firm policy or practice to affirmatively discuss costs with customers at the time of the recommendation of whether to buy, hold, or sell a security.”
- “Please indicate whether the firm has a conflicts of interest register or catalog.”
- “Do you maintain product-specific policies and procedures and share-class policies?”
If you find yourself struggling to figure out how you would have responded to these questions, you may want to consider reaching out to CSS for compliance guidance. Our Retail Division specializes in the ever-increasing state regulations. Or you can hide in your den and wait for spring to see what the state regulators bring.
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