What's Next for Build Back Better, Form CRS and the New Fiduciary Rule?

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.

See: Prep Your Clients for 2 Bills That Could Change IRAs in 2022

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.