The Stakes for a Clean Record are Now Even Higher

Effective June 30, 2020, the SEC is enforcing sweeping reform, titled “Regulation Best Interest”.

What does the SEC’s Regulation Best Interest mean for brokers?

The New Requirements
Effective June 30, 2020, the SEC is enforcing sweeping reform, entitled “Regulation Best Interest: The Broker-Dealer Standard of Conduct,” commonly referred to as “Reg BI.” At the same time, the SEC is also enforcing the use of the new Client Relationship Summary as a complimentary tool to meet these new obligations. Although technically separate rules, both were released on the same day, and both go into effect on the same day.

These regulations attempt to level the playing field between brokers and investment advisors by establishing a new “best interest” standard of conduct for brokers that is beyond current, existing obligations. The SEC states its reasoning as:

[i]mportantly, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.

​There are numerous changes at the broker-dealer level, including reduction of sales incentives, changes to investment recommendations, disclosure of fees, and elimination or disclosure of potential conflicts of interest. An exhaustive summary of those implications has been provided by SIFMA here.

However, if you are a traditional broker, a dually-registered financial advisor, or an IAR only, you may be asking yourself what these new rules mean for you. 

What are the important changes for all types of advisors?

Brokers and Dual Registrants
From the individual financial advisor standpoint, the largest shift of the SEC Reg BI will revolve around brokers and dual registrants both being required to use a new form to disclose all facets of the investor-advisor relationships, in writing.

This new form, known as the Client Relationship Summary (titled “Form CRS” for brokers and “Part 3 of Form ADV” for investment advisers), will require RIAs, broker-dealers, and associated persons to disseminate all material facts relating to the scope, terms, and potential conflicts of interest in regard to the relationship. These background facts, as well as any disciplinary history, must be provided to all retail customers. While using a relationship summary and other standardized disclosures about products and services in order to satisfy the disclosure obligation may be familiar, the Form CRS is a separate requirement that may not satisfy the disclosure obligation.

As a corollary, any broker or associated person, who is not also a supervised person of an investment adviser, will no longer be able to refer to himself by the terms “advisor” or “adviser” without violating the rule.

IAR Only
Many of the SEC’s Reg BI rules regarding fees and conflicts do not apply to IARs who have no brokerage affiliation because of the already heightened transparency of Form ADV. However, the additional disclosure required via Part 3 of the Form ADV will still apply. This will require a higher level of disclosure than that to which IARs have previously been accustomed, especially from a disciplinary history standpoint.

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Who is required to receive the Form CRS, and when?

For the purposes of casting a wide net, the SEC defines a “retail customer” as: 

[a] natural person…who seeks to receive or receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer and uses the recommendation primarily for personal, family or household purposes.”

​Financial advisors will be required to provide the Form CRS at multiple points throughout the year, including:

  1. by June 30,2020 to current retail clients;
  2. at the start of any new relationship or recommendation (even if agreement is oral);
  3. when there is a change to any account belonging to the retail investor;
  4. when any of the disclosures contained within the Form CRS change;
  5. upon request.

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Therefore, all retail customers and prospective clients will be required to receive a new Form CRS from their advisor.

Additionally, the SEC has made it clear that individual financial advisors will not be able to solely rely upon their RIA or broker-dealer to adequately communicate the disclosures required. The SEC is:

…requiring not only the broker-dealer entity, but also individuals who are associated persons of a broker-dealer (e.g., registered representatives) to comply with specified components of Regulation Best Interests . . .” 

What is included on the Client Relationship Summary (Form CRS)?

The SEC explains:

[t]o promote broker-dealer recommendations that are in the best interest of retail customers, we determined it was necessary to impose a more explicit and broader disclosure obligation on broker-dealers than that which currently exists under the federal securities laws and SRO Rules.” 

The vehicle for brokers providing these broader disclosures is the Form CRS. For SEC-regulated investment advisors, these disclosures will be received via amendments to the advisor’s Form ADV. The Form CRS will, therefore, be known as “Part 3” of the Form ADV. Dual registrants may submit one consolidated form for both brokerage and advisory accounts.

The SEC has published  Form CRS instructions, which enumerate what must be contained within the CRS and disclosed to all retail investors. These two-page customer relationship summaries (or four-page for dual registrants) must be written in plain language and are divided into:

  1. the types of services that the firm offers;
  2. the fees, costs, conflicts of interest, and required standard of conduct associated with those services;
  3. whether the firm and its financial professionals have reportable legal or disciplinary history; and
  4. where investors can find more information about the firm and advisor.

Of particular note, advisors who have accumulated any customer complaints, U5 terminations, or other negative disclosures over the course of their career must now provide this disciplinary information, in writing, to all retail customers and prospective investors. Reg BI rules include virtually all public disclosures available, including:

  • any disciplinary information contained on Form ADV (Item 11 of Part 1A or Item 9 of Part 2A);
  • any legal or disciplinary history in Form BD (Items 11 A-K);
  • any legal or disciplinary history for financial professionals (Items 14 A-M of Form U4);
  • any legal or disciplinary history for financial professionals (Items 7A or 7C-7F of Form U5 or Form U6)

The differences are extensive, but, when focusing on disclosable events, the primary difference is that IARs are inheriting the burdens typically reserved for brokers and dual registrants (e.g., more inclusive public disclosure requirements). On the flip side, brokers are inheriting the burden of IARs to provide a written breakdown of all fees, conflicts, and disciplinary history to all retail clients at the moment of engagement.

For those advisors holding out hope that this will be just another document that clients choose to give a cursory scan, the SEC requires that certain “conversation starters” must also be included for each section. These include:

  • “As a financial professional, do you have any disciplinary history? For what type of conduct?”
  • “What is your relevant experience, including your licenses, education, and other qualifications? What do these qualifications mean?”
  • Dual registrants, include: “Given my financial situation, should I choose an investment advisory service? Should I choose a brokerage service? Should I choose both types of services? Why or why not?”

To demonstrate the priority that the SEC has placed on these disclosures, if the Form CRS is provided to the investor in a package of other information, the Form CRS is required to be the “first among any documents” that are delivered at that time. Additionally, the Form CRS will be required to be prominently displayed on any advisor website in a form that is easily accessible.


What are the next steps for an advisor?

Immediately upon the SEC’s announcement, FINRA eagerly put broker-dealers and advisors on notice that it is going to be enforcing the requirements of Reg BI and incorporating it into its periodic reviews.

Being that Reg BI is codified in a 175-page document, the thought of FINRA taking on enforcement of it should make independent advisors incredibly nervous.

As facets of the Form CRS are being pored over by firm compliance racing to comply by summer, it is clear that, from an individual advisor level, the value of a disclosure-free record will increase exponentially. What once could be brushed away as information that prospects never considered when hiring their financial advisor will now be front and center in the conversation with current and future clients. Those savvy enough to have taken appropriate action to boast a clean history will find themselves positioned ahead of their colleagues with remaining disclosures.

Clear the hurdles.

Contact us by phone: (303) 952-4025 for a free consultation as to the viability of your case. We win nearly 90% of our cases, and we can give you an honest assessment as to what it would take to remove disclosures from your BrokerCheck.