Brokers try to figure out what ‘good faith efforts’ mean for Reg BI implementation

SEC has released risk alerts outlining examination expectations for Reg BI, Form CRS

Now that financial firms know that the deadline for implementing the Securities and Exchange Commission’s higher investment-advice standard for brokers remains June 30, they have to figure out what “good faith efforts” in implementation entail.

Last week, SEC Chairman Jay Clayton announced that Regulation Best Interest for brokers and the client relationship summary disclosure document, known as Form CRS, must be implemented by the original compliance deadline despite dislocations firms may be going through as a result of the COVID-19 pandemic.

Clayton said the SEC expects firms to “make good faith efforts” to comply by June 30. On Tuesday, the agency released two risk alerts to offer more detail on examinations that will commence during the first year of the new rules going into force.

The Reg BI risk alert says the SEC Office of Compliance Inspections and Examinations will evaluate whether firms have “made reasonable progress in implementing those policies and procedures.” The Form CRS risk alert also emphasizes that OCIE is looking for a “good faith effort” regarding implementation.

Both alerts acknowledge that the coronavirus has “created challenges for firms” and say the agency will work with them on problems that may arise.

So what does “good faith” implementation mean at a time when many firms are working remotely?

“I liken it to walking into the teacher’s office with your homework due,” said Aladin Abughazaleh, chief executive of ATA RiskStation, a cloud-based provider of technology for portfolio risk monitoring, client engagement and compliance. “If you have your hands in your pockets and say, ‘I’ve got nothing,’ that’s not good faith. [Firms] need to demonstrate some path they’re on to show they’re taking this seriously and a clear road map for how they’re going to be able to document all those requirements.”

Lawrence Stadulis, a partner at Stradley Ronon Stevens & Young, said he is telling financial firm clients not to take their foot off the implementation pedal and to show their work.

“Do as much as you can under the circumstances and document what you’ve done,” Stadulis said.

James Lundy, a partner at Faegre Drinker Biddle & Reath, said most firms have been taking the implementation of the SEC’s investment-advice reform package seriously since it was approved last June.

“It’s going to be a small percentage of firms who are going to be vulnerable to [examination] findings that they failed to make a good faith effort on implementation,” Lundy said.

Remote-working implementation challenges

Even if a brokerage remains diligent in its efforts, it is likely to face challenges on Reg BI implementation while its staff works remotely.

For instance, Stadulis said identifying potential conflicts of interest and establishing policies and procedures to address them will be difficult.

“It’s a thought-intensive provision that requires [staff] coordination, and that may be tough to do remotely,” he said.

Putting together compliance procedures to ensure investment recommendations are in clients’ best interests and aligned with their risk profiles also will be a heavy lift given firms’ operational disruptions, Abughazaleh said.

But the market volatility caused by the coronavirus may help on that front, as it is forcing brokerages to help their clients and their registered representatives understand heightened risk and to calibrate it to clients’ tolerance.

“Technologies and data modeling to support those two things can also be very helpful in getting you closer to being ready for the [Reg BI] care obligation,” Abughazaleh said.

The SEC advice rules are not the only ones staying on their implementation course. The Certified Financial Planner Board of Standards Inc. will also put into force on June 30 the strengthened fiduciary standard for the designation.

“We were pleased to see the [SEC] chairman hold firm on the June 30 enforcement date,” said Kevin Keller, chief executive of the CFP Board. “It is our intention to keep our June 30 enforcement date as well.”