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No Reg BI Extension Despite Health Pandemic

By Kara Siegel of Shustak Reynolds & Partners, P.C. posted on Monday, April 13, 2020.

Although COVID-19 has upended many aspects of American life and our economy, the SEC advises that the novel coronavirus will not delay implementation of Reg BI.

On June 5, 2019, the SEC adopted a new rule under the Securities and Exchange Act of 1934, which requires that broker-dealers and their representatives act solely in the “best interest” of their retail clients when making investment recommendations. “Regulation Best Interest”—or “Reg BI”—imposes new conflict-of-interest rules and requires broker-dealers to establish, maintain, and enforce policies reasonably designed to identify and fully and fairly disclose any such conflicts to investors. The SEC intends that the new regulation will align the standard of conduct for financial professionals with the reasonable expectations of retail customers that that their financial representatives will, in fact, act in the customers’ best interest.

Reg BI became effective September 10, 2019, and it provides a compliance date of June 20, 2020. Given the unprecedented impact of the novel coronavirus on businesses and government entities, including investor-service operations, some speculated that the SEC would defer the compliance date.

No such luck.

In a statement issued April 2, 2020, Jay Clayton, Chairman of the SEC, announced that the June 30, 2020 compliance date will remain in place, stating that the June date for firms to be fully compliant with Reg BI “remains appropriate.”

Clayton acknowledged the challenges market participants face in light of COVID-19. He emphasized the importance of Reg BI, however—both in codifying the “fundamental principle” that “investment professionals should not put their interests ahead of the interests of their clients and customers,” and as a “key component” of a broader package of rules and interpretations that the SEC adopted contemporaneously “to enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers.”

Clayton further noted that in the ten months since Reg BI was adopted, the SEC and its staff have “engaged extensively” with market participants and regulatory partners to ensure effective implementation of the new rule. The Commission’s communications with impacted firms suggest to the SEC that most have made significant progress in adjusting practices, modifying policies and procedures, and otherwise aligning their operations to comply with Reg BI. Accordingly, Clayton believes that the majority of impacted entities are prepared to timely comply with Reg BI.

Clayton acknowledged, however, that some firms may not be prepared to meet the deadline—or meet other deadlines—and he encouraged firms to contact the Commission “[t] the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance.” Clayton anticipated that the SEC would “take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.”

Thus, although the SEC will not extend the June 30, 2020 deadline for all impacted firms, the Commission may consider an extension for Reg BI compliance by firms whose circumstances merit relief.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney Kara Siegel can be reached in the firm’s San Diego office at (619) 696-9500.

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