SEC Says No Delay for Reg BI, Offers Focus Areas for Firms
In a recent public statement, SEC Chair Jay Clayton confirmed that the June 30, 2020 compliance date for Reg BI and the Form CRS requirements will not be postponed. The statement also noted that the SEC has established a new website page to provide educational resources and tools for investors to assist them in reading and understanding the Form CRS, and in researching firms and financial professionals.
The statement noted those areas where the SEC may be initially examining for Reg BI and CRS compliance. Specifically, the statement noted where firms should ensure that, particularly under current conditions, their focus is being applied. Those areas included, among other things, a firm’s recommendation or advice to a retail investor in the following:
- Rollovers and withdrawals from 401(k) and other plans. Reg BI’s application to recommendations of rollovers of and withdrawals from retirement accounts is one of its most significant enhancements over the status quo. Recommendations to retail investors to roll-over or transfer assets from one type of account to another, or to take withdrawals from an account, should be approached with care. Firms should be particularly attuned to their regulatory obligations in light of the additional flexibility Congress recently provided investors to take withdrawals from certain accounts.
- Complex or risky products. Recommendations or investment advice to retail investors regarding complex or risky products, including significantly leveraged products that rely on derivatives strategies to enhance returns, or those that focus on investments in less liquid and more volatile markets, should be carefully reviewed by firms to ensure that they are in the investor’s best interest. For example, inverse or leveraged exchange-traded products may not be in the best interest of a retail investor absent an identified, short-term, investor-specific trading objective.
- COVID-related investments. Since the spread of COVID-19 began, some companies have announced new products and services designed to address the health and other effects of the virus. A number of stock promotions have claimed that new products or services of publicly-traded companies can prevent, detect, ameliorate, or cure COVID-19, and that the stock of these companies will dramatically increase in value. A recommendation to a retail customer regarding COVID-related investments should be based, among other things, on an understanding of the potential risks, rewards and costs associated with the recommendation.
- SPACs and Other Structured Investment Vehicles. SPACs, or special purpose acquisition corporations, are created to raise money from investors on the premise that the sponsor of the SPAC will, in the future, identify and acquire another, usually privately-held, company. If a target company is not identified during a specific period of time, investors typically receive their money back. Because of this “money back” feature, retail investors may view SPACs as a relatively safe investment option, even though the structure and strategy of a SPAC may present complex risks. Recommendations of a SPAC or another type of structured investment vehicle should take any such risks into account.
Oyster Consulting has the knowledge and experience to support your efforts to comply with Reg BI. To receive assistance with the preparation of policies and procedures or disclosure documents, or to receive training to ensure you understand the impact of the Reg BI requirements, click here or call (804) 965-5400 and we will put you in touch with our experts.
About the Author: Evan Rosser is an experienced and respected securities industry professional with over 25 years of experience managing complex securities investigations for NASD/FINRA and providing compliance expertise to both broker-dealers and investment advisors. As an Oyster consultant, Evan has served as CCO for both investment advisors and broker-dealers, as well as providing compliance support to numerous broker-dealers and registered investment advisors. Evan has also served as an independent consultant in both SEC and FINRA enforcement actions involving Rule 15c3-5 and Market Access, AML, market manipulation and low-prices securities trading. He has served as an expert witness in FINRA enforcement actions and arbitrations. Prior to consulting, Evan supervised FINRA Enforcement’s investigative staff of more than 40 supervisors and examiners, and successfully completed hundreds of investigations alleging numerous FINRA and SEC rule violations including NASDAQ and OTCBB trading violations, excessive equity markups, and NASD/FINRA sales practice, corporate financing and advertising rule violations.