In June 2019, the SEC approved a new set of rules relating to financial advice. They will come into effect on 30 June 2020. Yet many broker-dealers and advisers are still “dawdling”, delaying action. Perhaps unclear on the terms of the ruling or what Reg BI even means for their organizations. For example, did you know that the new Form CRS will need to be written in plain language? And could you define what plain language is, let alone implement it across your business? We’ve put together some answers to FAQs that cover the headlines. We’ve focused on the plain language criteria because that’s our expertise.
Q: Why is it called so many different things?
A: Is it Reg BI or Form CRS? Well, it goes by many names. You might hear it called:
- Regulation Best Interest
- Regulation BI
- Reg BI
- Form CRS
The first three are pretty obvious, they are all variations on “Regulation Best Interest”. That’s the overall name of the SEC’s new rule.
Form CRS stands for “Client Relationship Summary”. It refers to the actual document that brokers will need to produce to comply with this rule. The document must be a maximum of four pages and written in plain English.
Q: What does the rule say?
A: The rule states that broker-dealers and advisers will need to fulfill a lot of new criteria. They will need to produce Form CRS documents that include details of:
- Conflicts of interest
Q: Who will see these Form CRS documents?
A: Your retail customers. You must deliver a copy of this document in paper or electronic format to your retail clients within 30 days after filing with the Central Registration Depository or the Investment Adviser Registration Depository. You will also need to deliver Form CRS to each retail customer before or at the time you enter into a client agreement; or
- Open a new account for the existing client;
- Recommend a rollover from a retirement account into a new or existing account or investment; or
- Recommend or provide a new advisory service or product that does not necessarily involve opening a new account or would not be held in an existing account
You will need to communicate any changes made to Form CRS to your existing clients within 60 days. And if clients request a copy, you’ll need to deliver it to them within 30 days.
Finally, you’ll need to post your current Form CRS prominently on your website for all to see.
So, Form CRS is going to enter the lexicon of brokers and advisers in a very big way.
Q: When will the rule come into effect?
A: Firms and brokers must comply by 30 June 2020.
Q: Can we relax after 30 June 2020?
A: No. You must comply by the June deadline, but the work won’t stop there. As you can see from our answer above, you’ll need to update and share your Form CRS regularly.
And you’ll need to ensure that all relationship summaries are always written in plain English.
Ask yourself honestly – do your advisers understand the principles of plain language? How will you benchmark this and track going forward?
If you haven’t got processes in place to manage this, you’ll need to make some big operational changes.
Q: What does “plain English” actually mean?
A: This is an important question.
Back in 1998, the SEC published a handbook to help advisers create disclosure documents written in plain English. We recommend using it to understand their key guiding principles.
In general, you should:
- Use active, not passive voice
- Keep sentences short – less than 25 words
- Aim your content at grade level 8 or below
- Use simple words – avoid jargon and complexity
The plain language website also has a really useful checklist to refer to alongside the SEC’s handbook. And if you need some support writing in plain language, you’re welcome to speak to one of our Clarity Experts.
Q: Why is this happening now?
A: The SEC created their plain language handbook way back in 1998. They have been promoting a plain English writing style for decades. So why the ruling now? Well, the financial services industry is experiencing a year-on-year decline in trust according to the Edelman Trust Barometer. And our own industry research tells us that financial services have not embraced plain language. The two go hand in hand. Complexity breeds distrust.
Reg BI is also hot on the heels of GDPR and Key Information Documents (KIDs). These are both recent examples of moves in Europe to improve clarity between consumers and institutions. In the Age of the Consumer, companies need to embrace clarity or face extinction.
This trend towards plain language has been a long time coming. It’s a huge opportunity for organizations to start to rebuild customer trust through transparency.
Q: What if I don’t comply?
A: At the time of writing we’re unaware of any fines or penalties that the SEC will impose. But industry officials suggest that the consequences for non-compliance could be serious. Bates Group wrote in a recent paper:
“…the obligations Reg BI imposes on financial firms are real and immediate. They require considerable preparation, and the consequences for failure to comply are heavy.”
Reg BI is coming. Embrace it.
And there are plenty of other reasons to comply. As we’ve said before, trust is everything. And complexity breeds mistrust. If you’re the only firm left hiding behind complexity post-Reg BI, you should be prepared to lose business.
Yes, the next few months are going to be hard work. Broker-dealers and advisers need to get to grips with Form CRS. Work out how to edit them down to two or four-page documents. And train themselves up as plain language experts. Processes will need to change, not to mention mindsets. We’ve put together some useful tips to walk you through the steps you’ll need to take in a separate blog post here.
But there’s a huge opportunity here. Organizations who get this right will see increased loyalty and happier customers. The race is on.