Compliance with the Securities and Exchange Commission’s
Customer Relationship Summary, or Form CRS, along with a new fiduciary rule
from the Labor Department as well as potential passage of a new tax and
spending bill are just a few items that will keep advisors on their toes in
2022.
Just before Christmas, the SEC issued sweeping guidance on
Form CRS, pointing to numerous disclosure aspects of the rule where advisors
are falling short.
The agency’s Standards of Conduct Implementation Committee,
according to the Dec. 17 guidance, “reviewed filed relationship summaries from
a diverse cross-section of firms and observed how firms have implemented the
content and format requirements of Form CRS.”
The SEC’s Division of Examinations as well as the Financial
Industry Regulatory Authority have also been examining firms to assess
compliance with the Form CRS requirements.
The SEC committee reviewed areas of Form CRS “where
compliance improvements appear to be needed — namely regarding specific
disclosure topics required by the form’s instructions, and with respect to the
general requirements pertaining to content, format and website posting.
For instance, the SEC pointed to shortcomings in
descriptions of relationships and services as well as fees, costs, conflicts
and standard of conduct.
The study noted that some firms’ relationship summaries did
not describe the services included as part of a wrap fee program. “Other
relationship summaries did not appear to adequately describe the fees and costs
of the programs.”
Ron Rhoades, associate professor of finance at Western
Kentucky University and director of its personal financial planning program,
told ThinkAdvisor that the SEC staff study “reflects the substantial level of
non-compliance with Form CRS, and essentially encourages firms to up their
game.”
Rhoades noted that he is “deeply disturbed” by the study’s
findings “wherein the staff stated that ‘some firms represented that they were
held to the ‘highest possible legal standard’ and characterized such a
statement as prohibited ‘marketing material’ in Form CRS.”
In his view, “that may well be an accurate reflection of a
firm’s adopted standard of conduct. Many fee-only RIAs adhere, in essence, to
the ‘sole interests’ fiduciary standard, which is in fact the highest standard
under the law. If firms are required to describe their standard of conduct,
they should be permitted to characterize it as ‘the highest possible legal
standard’ when such is a truthful statement.”
According to the compliance expert, “At its core, Form CRS
is constructed upon” the SEC’s Regulation Best Interest. “As such, the
mandatory language utilized in Form CRS to describe a broker’s standard of
conduct — ‘When we provide you with a recommendation, we have to act in your
best interest and not put our interest ahead of yours’ — misleads consumers. It
mischaracterizes the broker-customer relationship as one built upon trust and
confidence.”
Rhoades also explained: “The phrase is in direct opposition
to the SEC’s own statement in its 1963 study on the securities industry,
wherein it stated that broker-dealer advertising should not ‘create an
atmosphere of trust and confidence, encouraging full reliance on broker-dealers
and their registered representatives as professional advisers in situations
where such reliance is not merited, and obscuring the merchandising aspects of
the retail securities business.’”
The SEC’s long list of rules it plans to tackle in the New
Year, as reflected in its Fall Regulatory Flexibility agenda, does not mention
potential changes to Reg BI.
Rhoades maintained that “eventually, the SEC must face its
own mistake. By encouraging reliance by customers upon brokers, the SEC might
conclude that it must now apply a bona fide fiduciary standard upon them. Or,
the SEC might reverse course and rename and modify Reg BI as a rule that
somewhat limits conflicts of interest in the brokerage industry.”
Build Back Better Passage
As to passage in the New Year of President Joe Biden’s Build
Back Better tax and spending bill, Greg Valliere, chief U.S. strategist for AGF
Investments, said in his recent Capitol Notes briefing, that “portions of
Biden’s Build Back Better bill will pass after [Sen.] Joe Manchin and
progressives reach an uneasy truce.”
Some tax hikes, Valliere said, “are still possible (more on
this in early January), and there could be some new social spending programs
(pre-K education, Obamacare expansion, scaled-back green programs, etc).”
New DOL Fiduciary Rule
The Labor Department’s Fall Regulatory agenda still lists
December as the date for issuing its new fiduciary rule proposal.
Fred Reish, partner at Faegre Drinker in Los Angeles, said
that he doubts “that will happen since the Department is still accepting input
from the private sector” on crafting such a rule. “I would take this
[regulatory agenda] to mean that the release of a new proposed fiduciary
definition and related prohibited transaction exemptions is imminent, perhaps
within 60 days.”
However, Reish continued, “that could only refer to
submitting those proposals to the White House” for review by the Office of
Management and Budget. “That review could take another 60 to 90 days after that
before the proposals are approved and published in the Federal Register, which
will be when we will first see” what the rules say.
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