Expect Reg BI Enforcement Actions, DOL Rollover Crackdown in 2022

While Form CRS, often referred to as Form ADV, Part 3, is not required to be updated annually, the form's "update status is dependent upon material changes to its disclosures."

Since firms are now also completing updates to Form ADV for Q1 "and customer statements also go out at end of Q1, now would be a good time to assess Form CRS disclosures and update if changes needed," Lynch advised. "The new Form CRS could be delivered to customers along with the Q1 statements."

Schroeder added that according to the SEC's guidance, "attempts to streamline/tailor the Form CRS requirements to a firm's business model will not be met with approval."

While it is a "very real challenge to include all the information that Form CRS requires in an easy-to-read, concise format," Schroeder said, "the SEC has signaled that it will not tolerate omitting information, modifying prescribed language, changing the order or format of the disclosures, or referring to more detailed disclosures outside the document."

DOL Fiduciary Rule

President Joe Biden on Jan. 4 renominated ERISA attorney Lisa Gomez to head the Labor Department's Employee Benefits Security Administration, the agency overseeing retirement plan rules.

If confirmed by the full Senate, Gomez will be the point person on helping Labor shepherd a new fiduciary rule.

Phyllis Borzi, former head of EBSA, told me in a recent email message that she believes EBSA "is pretty far along in its thinking about (if not drafting) the structure" of the new fiduciary rule.

Fred Reish of Faegre Drinker said that "the release of a new proposed fiduciary definition and related prohibited transaction exemptions is imminent, perhaps within 60 days."

However, "that could only refer to submitting those proposals to the White House" for review by the Office of Management and Budget, which could take another 60 to 90 days.

What Will the New Fiduciary Rule Say?

Borzi said she expects Labor to propose amendments "to the basic fiduciary definition to correct the obvious defects/loopholes in the five-part test [on who's a fiduciary] that have clearly emerged since the initial reg was issued in 1975."

Labor will also likely propose clarifications "in the rollover context, limited by the legal constraints they face based on the odd statutory structure where DOL has interpretive and administrative jurisdiction over the fiduciary definition and interpretations regarding IRA rollovers, but [the Department of the] Treasury has the enforcement authority through imposition of the excise tax" for prohibited transaction exemptions, or PTEs.

"Undoubtedly," Borzi said, "we will see proposed tightening via the imposition of new limits and conditions on some existing PTEs," such as PTE 84-24, which applies to insurance sales (life insurance and variable, fixed indexed and fixed rate annuities) and to receipt of commissions.

Labor has also indicated that it intends to revisit the conditions of PTE 2020-02, dubbed "Improving Investment Advice for Worker & Retirees," Borzi said. That exemption, intended to align with the SEC's Regulation Best Interest, was allowed to take effect by the Biden administration last February.

Labor may also "even propose an additional PTE," Borzi said.

Level the Playing Field

EBSA, as a general matter, Borzi said, "is concerned about the unlevel playing field between conflicted recommendations regarding insurance products and securities.

"As flawed as many of us believe Reg BI is, at least it imposes some limits on conflicted advice when investments in securities are recommended," Borzi said.

In marked contrast, she continued, the National Association of Insurance Commissioners' "model law (which is only applicable when and to the extent each state adopts it and with no apparent enforcement mechanism) makes it quite clear that it is merely a codification of the pretty useless [FINRA] suitability standard."

How will Labor "propose to impose greater accountability for conflicted recommendations of insurance products than is currently the case?" Borzi wondered.

"I wouldn't be surprised if the proposed expansion of PTE 2020-02 includes bringing some or all insurance products within its purview, but at the very least, I expect they will impose adding the impartial conduct standards to PTE 84-24 and some of the other older PTEs," she said.

With respect to Reg BI, "I believe that the staff of the two agencies has been continuing to talk about how to better coordinate the two standards so that key terms in Reg BI are more clearly defined and are more consistent," she said. "That doesn't mean that either agency would defer to the other, but rather the regulatory structures would be more complementary and consistent than may currently be the case."