Cory Roberson, Principal of FIN Compliance and FIN Lancer
The Client Relationship Summary form (Form CRS "ADV Part 3") requires registered investment advisors and broker-dealers to inform retail investors with an overview of their professional relationship in a simple and comprehensible manner. This relationship summary allows investors to access additional information on these subjects using a layered disclosure. In order to promote comparisons by retail investors, the relationship summary is standardized in a question-and-answer format that is unique from current disclosures.
David McNeal, Consultant and Contributor of My Compliance Blog
June 5, 2019 - The Securities and Exchange
Commission (“SEC”) voted to adopt a revised fiduciary standard known as
Regulation Best Interest (Reg BI) and a Client Relationship summary (“CRS”)
disclosure form aimed to provide investors with information to determine:
the type of business they work with,
the services received, and
how they pay for
such services.
The regulation BI framework is
generally considered to be the commission’s answer to the Department of
Labor’s efforts to institute a revised fiduciary standard. The actions
will require procedural updates for broker-dealers and investment
advisors.
“The rules and interpretations we are adopting today
address issues that the Commission has been actively considering for nearly two
decades,” said SEC Chairman Jay Clayton.
“Our staff, working collaboratively across all of our
Divisions and many of our Offices, has leveraged its decades of experience and
expertise in considering these issues. I believe that the exceptional work of
the SEC staff, including their careful evaluation of the feedback we received,
will benefit retail investors and our markets for years to come.”
If a retail
investor chooses a broker-dealer or investment adviser (or both of them), the
retail investor shall be entitled to a recommendation (by a broker) or to a
counsel (by an investment advisor) that is in the retail investor's best
interest and does not put the company's incentives or those of the financial
professionals ahead of the customer.
Regulation Best
Interest to protect retail investors
Regulation Best
Interest (Reg BI) sets a new behavioral standard, specifically for broker
dealers, which is aimed to improve the requirements of conduct for broker
dealers. The standard of conduct is based on key trust principles and
cannot be met by disclosure alone. It contains specific requirements for
dealing with certain aspects of relationships between broker dealers and retail
clients, including some compensation conflicts.
Under Reg BI, broker-dealers will
be legally required to act in the best interest of the client and cannot place its own priorities ahead of a retail investor when giving
advice or suggesting any securities transaction or investment strategy.
Regulation Best
Interest includes the following components:
Disclosure
Obligations: A look into services
The new rules are
aimed to improve the behavior of broker dealers to their customers and bring
the standards of conduct into line with the reasonable expectations of
investors. The regulations will also provide retail investors with additional
transparency and clarity through improved disclosures in order for clients to
make informed decisions.
Broker dealers
must disclose material facts about their relationship and recommendations,
including specific disclosures on the broker's capacities, fees, services
provided, disputes, service and product limitations and its supervisory
services.
The
interpretations reaffirm that investment advisors must clarify the standard of
conduct and their scope of services in accordance with the statutory definition
of an investment adviser.
Care Obligation: A look into
registered reps/agent activities
When making a
recommendation to the retail customer, a registered representative (“agent”)
must exercise due diligence, care and competence. The broker-dealer and its
reps must understand the risks, rewards and costs that the recommendation
involves. The rule requires that the agent must consider its clients
investment profile and make a recommendation in their best interest. As
a result of the proposal, the final regulation requires explicit consideration
by the broker-dealer of its costs.
Conflict of
Interest Obligation: How the firm addresses some of its risks
The broker-dealer
shall establish, uphold and implement written policies and procedures designed
so that conflicts of interest are reasonably identified and at least disclosed
or eliminated. This requirement, an improvement on the proposal, requires policies
and procedures specifically to:
Eliminate
conflicts that could create incentives for a firm’s financial professionals to
place their interests ahead of those of the retail customer;
Prevent material
limitations on offerings, such as a minimal product menus and proprietary
products, that could cause the firm or its financial professional to place its
own interests ahead of the customer; and
Eliminate sales
contests, sales quotas, bonuses, and non-cash compensation that are based on
the sale of specific securities or specific types of securities within a
limited period of time.
Compliance
Obligation: Procedures
Manual
By enhancing the
proposal, broker dealers must establish, maintain and apply policies and
procedures to ensure compliance with the best interest regulation.
Form CRS
Relationship Summary
At the start of
their client relationship, investment advisors and broker dealers shall provide
a summary of relationships for retail investors. This will include an overview
of a firm’s services, fees, costs, interest disputes, legal standards of
conduct and the disciplinary history of the practice and its financial
professionals.
The Client Relationship Summary form (Form CRS "ADV Part 3") requires registered investment advisors and broker-dealers to inform retail investors with an overview of their professional relationship in a simple and comprehensible manner. This relationship summary allows investors to access additional information on these subjects using a layered disclosure. In order to promote comparisons by retail investors, the relationship summary is standardized in a question-and-answer format that is unique from current disclosures.
Form CRS will also
include a connection to a dedicated page which provides education information
about broker-dealers and investment advisors and other materials on the
Investor Education website of the Commission.
Investment Adviser
Interpretations
An investment
adviser owes its clients a fiduciary obligation in accordance with the Advisers
Act. In its final interpretation, certain
aspects of the federal trust obligation which an investment advisor
owes to its clients are reaffirmed and in certain cases clarified.
For example, when
reporting recommendations, including a plan to move assets in a working
retirement plan account to an IRA, and/or for a plan distribution apply to the
enhancement of the proposal. Regulation Best Interest also applies to implicit
"holding recommendations" arising from agreed account surveillance. (ref. (1)
Duty of Care; and (2) Duty of Loyalty--act in client’s best interest).
Solely Incidental
Interpretation
The rule excludes
a broker-dealer under the Advisers Act whose performance of advisory services
is solely accessory to the conduct of his business as a broker or distributor,
and who is not paid a special compensation for such services from the
definition of investment advisor —and thus from applying the Advisers Act.
With the adoption
of Reg B-I, the Commission released an
interpretation to confirm and
clarify the "Soley Incidental" prong under the Advisers Act, which is meant to clearly
define when the consultative operations by a broker-dealer leads it
to become an investment advisor within the context of the Advisers Act.
This interpretation supports and clarifies the role of the Commission and
highlights the application in connection with exercising investment
discretion over client records and account monitoring.
Applicability date
of Reg B-I and Form CRS.
In order to give
firms enough time to be compliant, Regulations Best Interest and Form CRS are
made effective 60 days after their publication in the Federal Register and
include the transition period until 30 June 2020. Once we are
published in the federal register, our interpretations under the Advisers Act
become effective. Reference "SEC
Reg BI proposal"
This is a good time to create a
system for updating your firm’s procedures.
Email Us to schedule a brief session to review needs
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Compliance/Business Management Systems
About FIN Compliance
FIN Compliance (FinCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management software tool, FIN Ventures, providing business/startup strategies, and FINLancer, a business management portal featuring: E-signature tools; Invoicing integration, Vendor Directory, continuity directory*, business client document portal, and more (available by Q4 2019).
Our Products and Services
RIA Registration Services: Adding new Jurisdictions
Compliance Consulting: Ongoing review Assistance, policy & procedures, and filings.
Compliance Management System: for internal review process.
Business Management System: for Project/Task Delegation, Business/Firm Directory, E-contracts, workflows, and more
Compliance Consulting: Ongoing review Assistance, policy & procedures, and filings.
Compliance Management System: for internal review process.
Business Management System: for Project/Task Delegation, Business/Firm Directory, E-contracts, workflows, and more
Succession Planning/Transition and, Partner Matchmaking Services
We are pleased to announce a new deal flow service that includes transition planning, deal flow, and partnerships. We will have more information available as our offering develops. Both older and new advisors alike can begin to prepare for changes in the industry. It’s a good time to evaluate opportunities whether you are a young firm looking to buy a book of business or an older advisor looking to establish an exit for retirement. For firms interested, we are offering a matchmaking service to connect older and new firms together for deal flow, succession planning, partnerships, and more.
Business Directory
Impact
FIN Missions (FINmissions.com) provides business support group sessions for other entrepreneurs. In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.
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