The Securities and Exchange Commission doesn’t plan to let any grass grow under its feet when it comes to checking on the implementation of investment-advice reform by brokers and registered investment advisers.
In its annual examination priorities document released Tuesday, the SEC’s Office of Compliance Inspections and Examinations said it will check with brokers on their progress in implementing Regulation Best Interest, which is designed to strengthen the broker standard of care, before the June 30 deadline.
In July, OCIE will immediately start to probe compliance with Reg BI as well as with the customer relationship summary known as Form CRS, which is meant to illustrate for clients the differences in fees and services between brokers and advisers.
“After the compliance dates, OCIE intends to assess implementation
of the requirements of Regulation Best Interest, including policies and
procedures regarding conflicts dislclosures, and for both broker-dealers and RIAs, the content delivery of Form CRS,” the priorities document states.
The SEC approved the advice-reform rulemaking package containing Reg BI and Form CRS last June. Often when a new rule goes on the books, the SEC provides a grace period before examining for it, said Ivan Harris, a partner at Morgan Lewis.
“We typically don’t see such an immediate focus on compliance with a new rule as we’re seeing with Reg BI,” Mr. Harris said. “Having OCIE focus on it is only going to put more pressure on firms to make sure they meet the compliance deadline. This sends a clear message that firms are expected to
be laying the groundwork now for the effectiveness of the rule this summer.”
SEC examinations this year also will target electronic investment advice, often called robo-advisers.
“The increasing rate of new formations of robo-advisers is a factor that’s leading to the increased SEC focus,” said John Lore, managing partner at Capital Fund Law Group.
When it probes automated investment tools and platforms, the SEC said it will concentrate on “adherence to fiduciary duty, including adequacy of disclosures,” among other areas.
That could present a compliance challenge for online investment advisers, Mr. Lore said. “It requires a deep understanding of the client’s needs and objectives that is difficult to do in a robo-advisory,” he said.
Once again this year, the SEC said it will target disclosures of fees, expenses and conflicts of interest, as well as the costs of investments such as mutual funds and exchange-traded funds. It highlighted its ongoing probe of financial incentives that promote the selection of high-fee funds.
“It does appear the focus on fees is not ending any time soon,” Mr. Harris said.
In the priorities document, OCIE indicated that it examined 15% of registered investment advisers in fiscal 2019, down from 17% in fiscal 2018 but up from 10% in fiscal 2014. It noted that a government shutdown last January affected its statistics. The SEC said it has been able to make gains in adviser coverage through program efficiencies, realignment of internal staffing and investment in training.
The number of RIAs that OCIE oversees increased from 11,500 in fiscal 2018 to 13,475 in fiscal 2019, while RIAs’ assets under management grew from $62 trillion to $84 trillion.