SEC Compliance Inspections and Examinations Risk Alerts

On Tuesday, April 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued two risk alerts titled: (1) Examinations that Focus on Compliance with Regulation Best Interest (“Reg BI”) and (2) Examinations that Focus on Compliance with Form CRS. The risk alerts provide advance information about the expected scope and content for initial examinations for Reg BI and Form CRS. The compliance date for both is June 30, 2020.

Regulation Best Interest
Reg BI established a new standard for broker-dealers, which requires broker-dealers to act in the best interest of the customer when making recommendations. After the compliance date, OCIE will begin examinations to determine if firms have established policies and procedures reasonably designed to achieve compliance with Reg BI. OCIE will also review whether firms have made reasonable progress in implementing those policies and procedures. The risk alert provides examples of areas the staff may focus on for each Reg BI obligation, as well as a sample request for information and documents that will be reviewed during the examinations. The risk alert for Reg BI can be found here.

Form CRS
Form CRS and its rules require broker-dealers and investment advisers to deliver to retail investors a brief customer or client relationship summary that provides information about the firm. After June 30, 2020, OCIE staff examinations will focus on determining whether firms have made a good faith effort to implement Form CRS. Example areas of focus for examinations include delivery and filing, content of the relationship summary, formatting, updates to policy and procedures, and recordkeeping. The risk alert for Form CRS can be found here.

Broker-dealers and investment advisers should view these two OCIE risk alerts as a clear signal that compliance with Reg. BI and Form CRS will be a focus of futures exams. Accordingly, OCIE exam staff is unlikely to be impressed by explanations of surprise by firms who are unprepared to respond to exam requests relating to Reg. BI and Form CRS compliance.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.