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Form CRS Not Enough to Satisfy Regulation BI’s Disclosure Obligations

The SEC’s Division of Trading and Markets, in recently released FAQs, clarified that Form CRS (the newly required Customer Relationship Summary) will not satisfy a broker’s Regulation Best Interest disclosure obligations.  The staff opines that Regulation BI and Form CRS have “distinct disclosure delivery obligations” that cannot be satisfied through a hyperlink or other cross-reference.  Regulation BI requires disclosure of “all material facts relating to the scope and terms of the relationship with the retail customer and all material facts relating to conflicts of interest that are associated with the recommendation,” information that likely exceeds Form CRS’s specific requirements.  The staff also notes that, in most cases, brokers may not make oral disclosures, then make a recommendation, and then follow up with the written disclosures.  The FAQs also address the definition of “recommendation” and how to mitigate conflicts of interest.

Expect several more FAQs this year as firms grapple with implementing Regulation Best Interest and Form CRS.  One practice point on conflict of interest disclosure: If it takes more than two sentences of disclosure, you probably shouldn’t do it.