Ending speculation over whether the SEC would extend its COVID-19 regulatory relief to postponing the June 30 compliance dates for Form CRS and Regulation Best Interest, two key parts of the agency’s recently passed Standards of Conduct package, Chairman Jay Clayton gave a firm no.
“We believe that the June 30, 2020 compliance date for Reg BI and other requirements, including the requirement to file and begin delivering Form CRS, remains appropriate,” he said in an April 2 public statement. Firms, he said, should apply a general approach to allocation and resources that puts health and safety first, as well as the SEC’s message that “the law continues to apply.” With this approach in mind, he said that “firms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances.”
Should a firm be “unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance, the firm should engage with us,” Clayton said. “I expect that the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.”
“We recognize that Reg BI and Form CRS are significant regulatory enhancements and that firms have dedicated, and are continuing to dedicate, substantial time and resources to comply with the new requirements. Investors have and will continue to benefit from these efforts,” he said. “These efforts – and importantly their aim: to align conduct and disclosure requirements with reasonable investor expectations – should continue on course to the extent possible under the circumstances.”
Prior to Clayton’s statement, there had been speculation in the asset management community that the SEC would delay the Form CRS and Reg BI compliance dates because of the coronavirus, just as they had for regulatory reports last month. Under those extensions, the Form ADV reports for which the original extension date was on or before April 30 are now extended to those whose due dates are on or before June 30. As before, the exemption requires that reports must be submitted no later than 45 days after the original filing due date.
The agency, however, clearly sees the Standards of Conduct components as a different matter.
“The decision doesn’t surprise me at all,” said former SEC Division of Investment Management Director Barry Barbash, now with Willkie Farr. “A paramount objective of the SEC is to protect the interests of retail investors. The Commission has made it quite clear over the past few weeks that it is very concerned that those interests can be compromised as ordinary investors focus on health and not money matters. The SEC seems justifiably to fear that the ongoing pandemic will heighten fraud attempts against retail investors. So, if anything, COVID-19, from the agency’s point of view, reinforces the need for the SEC to make sure that firms meet the June deadline.”
He further noted that the Standards of Conduct package seems to have been a priority of Clayton’s “almost from day one of his tenure.”
Willkie Farr partner and former SEC Deputy Chief of Staff James Burns said that his understanding was that the idea of an extension received “a pretty frosty reception when floated recently with the staff.”
“Still, a lot can happen between now and June 30, especially as firms work to deploy new controls and supervise their professionals in this period where almost all work (and supervision) is happening remotely,” he said. “We’ll see whether those firms that presently think they need more time continue to feel that the pressure is not appropriate given what else they are up against, and, if so, whether they want to deploy resources trying to persuade the SEC that a delay is warranted. But I wouldn’t pin any great hopes given Clayton’s statement.”
“The SEC believes this initiative is critically important from a retail investor protection perspective, and that timely implementation of the regulation is therefore warranted here,” said Stradley Ronon partner Lawrence Stadulis. “At the same time, the SEC recognizes the constraints that the pandemic is imposing on the industry. For this reason, it is looking for a good faith attempt at compliance at this time. Absolute perfection is not the gold standard here where firms genuinely try to comply.”
“If things haven’t substantially improved by the end of the month, I hope the Commission rethinks the Form CRS deadline,” said Pickard Djinis and Pisarri partner Mari-Anne Pisarri. “Advisers are working very hard right now to calm their clients’ jittery nerves and keep them focused on the long term. Under the best of circumstances, Form CRS could confuse those who have already received Form ADV brochure disclosures, and who may wonder why they are receiving another, ‘off-season,’ largely scripted, disclosure form – and these are hardly the best of circumstances.”
“In order to avoid confusing their existing clients, many advisers will probably explain that the new form is being sent to satisfy a new SEC requirement,” she said. “But telling frightened investors that the SEC wants them to ask questions like, ‘Given my financial situation, should I choose an investment advisory service?’ could do enormous damage. The best approach, I think, would be to delay implementation of Form CRS for at least six months, or better yet, harmonize it with next year’s annual ADV update. This is not the time to yell ‘Fire!’ in a crowded theater.”
Stern Tannenbaum partner Aegis Frumento said he was not surprised by Clayton’s announcement that the deadline for complying with Reg BI and Form CRS would not be adjusted. “First of all, the compliance date is still 90 days into the future, and Clayton essentially is taking a ‘wait and see’ attitude. That makes sense. As a practical matter, people should already be doing their best to comply with the Rule. If your firm cannot have written policies and procedures in place by June 30 because of the pandemic, I’m sure you’ll have good defensive arguments if the SEC raises questions. But if you take advantage of the pandemic to exploit your customers, you’re going to be sorry.”
“Let’s face it,” Frumento said. “You don’t need fancy policies and procedures to put the customer’s interests first. The basics are simple: Don’t recommend anything to your client that might tangentially benefit you without fully disclosing how you might benefit. If you follow that simple rule, it would be hard for a regulator to fault you no matter what else is left undone.”
Post compliance date
Clayton also used his public statement to provide a window into how the SEC will address compliance with Form CRS and Reg BI after June 30.
Among the actions the agency will take, he said, will be the issuance of two risk alerts from the SEC’s Office of Compliance Inspections and Examinations. “One provides broker-dealers with specific information about the scope and content of initial examinations for Reg BI,” Clayton said. “The other provides broker-dealers and investment advisers with similar information with respect to Form CRS.”
In a broader vein, he said that during the initial period following June 30, SEC examiners will be focusing on whether firms have made a good faith effort to implement policies and procedures necessary to comply with Reg BI, while also providing an opportunity to work with firms on compliance and other questions.
Clayton, in fact, in a speech last May, took on much of that criticism, stating that some of the commentary showed “a lack of understanding of the law and legal obligations of financial professionals, both before and after adoption of our rulemaking package.” (ACA Insight, 7/15/19).
Form CRS, adopted by the Commission on June 5, requires advisers and broker-dealers to provide new and prospective clients with a short summary (two pages for advisers and broker-dealers, four pages for dual registrants) of the services their firms perform, how they are compensated, past disciplinary history, and more.
Regulation Best Interest, also adopted June 5 and also with a June 30 compliance date, is aimed more at broker-dealers, and requires them to meet a standard of conduct that goes beyond the existing suitability standard. Under Reg BI, “when making a recommendation of a securities transaction or an investment strategy involving securities, a broker-dealer must act in the retail customers best interest and cannot place its own interests ahead of the customers’ interests,” according to the SEC.