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REG BI Compliance Deadline; Financial Relief Considerations for RIA Firms

by | Apr 13, 2020 |

By Stephen Wilkes, Livia Quan Aber and Seth Gaudreau

I.  The SEC Will Not Delay Reg BI and Form CRS Compliance Date

Last week, the U.S. Securities and Exchange Commission (“SEC”) Chairman, Jay Clayton, confirmed in a public statement (found here) that there will be no industry-wide extension of the June 30, 2020, deadline for compliance with Regulation Best Interest (“Reg BI”).  Reg BI, which was adopted by the SEC in June 2019, enacted a “best interest” standard of conduct on broker-dealers making recommendations of securities or investment strategies to retail clients.  The June 30 compliance date also applies to the new rule requiring both broker-dealers and investment advisers to provide retail clients with a disclosure form about the nature of their relationship, known as Form CRS.

Chairman Clayton acknowledged the challenges that firms are facing, but said that “firms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances.”  He advised that regulators may show restraint in their examination of firms, in the initial post-June 30th period, for firms that have made a “good faith effort” to implement policies and procedures necessary to comply with Reg BI and Form CRS.  Chairman Clayton further stated:, “To 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, the firm should engage with [the SEC staff].”

In its continued effort to assist firms with compliance obligations overall, and during the COVID-19 pandemic, on April 7, 2020, the SEC Office of Compliance Inspections and Examinations (“OCIE”) issued two companion risk alerts for Reg BI (found here) and Form CRS (found here) compliance.  The risk alerts provide firms with additional visibility into how OCIE may review a firm’s Reg BI program and Form CRS enactment and the documents it may request as part of its review.  Firms should consider using this information to assess their implementation plans for Reg BI and Form CRS and whether they are prepared to meet OCIE’s requests.

What Firms Can Do Now

Broker-dealers and investment advisers (for the Form CRS only) should continue working toward implementing the final phases of their Reg BI and Form CRS compliance regimes.  Chairman Clayton stated that he expects that “the Commission and the staff will take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.”  Firms need to carefully document and monitor any disruptions to implementation created by the COVID-19 pandemic.  In particular, how government-imposed “stay-at-home” orders and restrictions are affecting firm resources (including third-party vendors) that are available to implement compliance with Reg BI and Form CRS.  If, despite firms’ best efforts, compliance is not feasible, they should engage the SEC.

II, Paycheck Protection Program and Economic Injury Disaster Loans: Considerations for Investment Advisers and Broker-Dealers

The CARES Act provides two types of financial relief for small businesses in the form of the Paycheck Protection Program and the Economic Injury Disaster Loan.  While the loans available under both programs may seem attractive, investment advisers and broker-dealers should understand the terms and conditions, eligibility for forgiveness, and additional compliance obligations imposed upon borrowers.

Paycheck Protection Program (PPP)

As discussed in an earlier Alert, a loan under the PPP is available for small businesses (500 or fewer employees), including independent contractors and sole proprietors, to cover eligible expenses.  Eligible expenses include payroll costs, mortgage payments, rent, and utilities incurred between February 15, 2020 and June 30, 2020.  The main purpose of a PPP loan is to encourage small businesses to maintain existing employment levels, which is why not more than 25% of the loan proceeds may be used for non-payroll costs.  “Payroll costs” include wages, salaries and commissions; paid vacation, parental, family, medical or sick leave; severance pay, cost of group healthcare benefits (including premiums); payments for retirement benefits; and payments for state or local taxes on employee’s compensation.  However, compensation in excess of a prorated $100,000 of salary cannot be taken into account.

Qualifying advisory and broker-dealer firm borrowers should bear in mind that loan forgiveness is subject to conditions and is not a certainty.  Loan forgiveness only applies to the extent the proceeds are used for payroll costs not in excess of the per person limitation on salary compensation, payment of interest on any covered mortgage loan obligation, and payment of any covered rent obligation.  However, not more than 25% of the loan forgiveness amount can be applied to non-payroll costs.  If the firm reduces its workforce or if there is a reduction in wages, the amount eligible for forgiveness will also be reduced in accordance with a specified formula.

Note that independent contractors and sole proprietors are able to apply for a PPP loan and so should not be considered as part of the firm’s “500 or fewer” headcount.

Economic Injury Disaster Loan (EIDL)

Between January 31, 2020 and December 31, 2020, the CARES Act creates flexibility for access to EIDL loans for businesses with 500 or fewer employees, independent contractors, and sole proprietors.  It does so by waiving personal guarantees on advances and loans below $200,000, waiving the requirement that an applicant must have been in business for at least one year, and waiving the requirement that the applicant is unable to obtain credit elsewhere.  However, an EIDL loan and a loan under the PPP cannot be taken for the same purpose.

The CARES Act also established an emergency grant to permit an entity that has applied for an EIDL loan to request an advance if the loan is not more than $10,000, which the Small Business Administration must distribute within 3 days of filing an application.

FINRA Updates FAQs

On April 2, 2020, FINRA updated its Frequently Asked Questions (FAQs) (available here) to ease the way for broker-dealers to access CARES Act loans.  Under the FAQs, firms may “exclude the liability,” that is, the loan amount, from its “aggregated indebtedness in computing its minimum net capital requirement.”  Furthermore, the loan amount may be “add[ed] back…to their net worth for purposes of computing net capital.”


Before applying for financial relief under PPP or EIDL, compliance officers should carefully consider the extent to which participation in a CARES Act financial relief program triggers any supervision, training, or disclosure obligations.  With respect to its independent contractor workforce, consideration should be given as to whether their participation in PPP or EIDL needs to be inventoried, tracked, and monitored.