T+1 Accelerated Settlement: DTCC Proposal…
On June 5th 2019, the SEC passed its Regulation Best Interest rule by 3-1. The goal is to improve the quality and transparency of relationships, while retaining access to advice relationships and investment products. The rule will impact how advice is currently delivered to retail customers.
In April 2016, the DOL published a regulation setting a new standard for advice given to retirement investors where any individual receiving compensation for providing advice in making a retirement investment decision would be considered a “fiduciary”. In March 2018, the US Court of Appeals ruled that the DOL had overstepped its statuary authority placing the future of the rule in jeopardy. The DOL is working with the SEC and is expected to publish a revised proposal in December 2019. Some states such as Nevada, New Jersey, and Massachusetts believe the SEC did not go far enough with Reg BI are calling for increased action which could result in additional regulatory requirements with some brokers held to a fiduciary standard and others not
Regulation Best Interest is comprised of two main pillars - Regulation Best Interest Obligation and Form Client Relationship Summary (CRS). The package also includes the Standard of Conduct for Investment Advisors, and a new interpretation of “Solely Incidental”. Regulation Best Interest will require brokerdealers and investment advisors to make recommendations that are in the best interest of the retail client, as well as disclose and/or mitigate any and all potential conflicts of interest the broker-dealer has concerning the recommendation of a financial product. This regulation aims to protect the interests of retail customers and prevent broker-dealers and advisors from placing their own financial interest above the retail customer. Form CRS will require firms to provide retail customers with information at the beginning of the relationship which will include a disclosure of fees, costs, standard of conduct and conflicts of interest, as well as a clear understanding of the firm’s services, among other things. Form CRS is aimed at reducing common confusion of retail customers over the terms and details of the relationship with their broker-dealer or investment advisor.
Regulation Best Interest applies to investment recommendations, including recommendations concerning account types and IRA rollovers. The Regulation Best Interest obligation is satisfied when complying with the following obligations: Disclosure, Care, Conflict of Interest, and Compliance:
Prior to a recommendation, broker-dealers must provide full and fair disclosure of the following:
The Care Obligation applies to recommendations of account types and IRA rollovers. The broker-dealer must exercise reasonable care to: a. Understand the costs, risks, and rewards of a recommendation. b. Have a reasonable basis to believe recommendations or a series of recommended transactions are in the customer’s best interest.
Broker-dealers must have policies and procedures to:
Broker-dealers must have policies and procedures to comply with Regulation Best Interest as a whole.
The implementation and compliance deadline for Regulation Best Interest Obligation is June 30, 2020.
The Form CRS component of Regulation Best Interest will require a detailed disclosure of a firm’s advisory services and terms be provided to each retail customer in simple and easily understandable language. This form applies to every broker dealer that provides services to a retail investor.
1. The broker-dealer must hold a record of the date every CRS form was provided to a retail customer, including any CRS form provided to a retail customer before they open an account.
Form CRS must be implemented and filed in a text searchable format with the SEC by June 30, 2020
|Key Requirement||DOL||Reg BI|
|Account Coverage||Non-Taxable||All Accounts (Excluding ERISA)|
|Fiduciary Standard||✓||RIA’s only (As defined by the Investment Adviser Act of 1940)|
|Best Interest Standard||✓||✓|
|BICE & Principal Trading Exemption||✓||✕|
|Disclosures||Point of Sale Disclosure Website Disclosure, Annual Disclosure, Data Disclosure||Point of Sale Disclosure Form CRS|
|Record Keeping and Retention||✓||✓|
|Record Keeping and Retention||✓||✕|
|Liability-Private Right of Action||✓||✕|
Regulation Best Interest will create the need for widespread changes throughout the Investment Advice Industry.
Sia Partners has developed an approach and implementation plan to assist firms in their initiatives to comply with Regulation Best Interest.
Sia Partners Assets: Impact Analysis (Product & Functional), Currents State and Gap Analysis, Process Flows
Sia Partners Assets: Target Operating Model, Prioritized List of Initiatives, Implementation Roadmap
Sia Partners Assets: Program Governance, Business Requirements, Test Strategy, Training & Communication Plan, Policies & Procedures