April 2020

Dear SDDco Clients and Colleagues: Our SDDco Perspective includes industry news, guidance, regulatory rule updates, deadlines, and other timely matters impacting brokers, advisors, fintech firms, taxpayers, investors, and their service professionals. The SDDco Perspective is made available on our website monthly at http://sddco.com/resources-newsletter.

IN THIS ISSUE:

• SEC Reaffirms the Implementation Date for Reg BI
• COVID-19 is a Catalyst for Business Innovation
• Investors Remain Front of Mind at the SEC
• What is the CARES Act?

SEC Reaffirms the Implementation Date for Reg BI

As of June 30, 2020, broker-dealers and their associated persons will be tasked with a new general obligation and standard of conduct when making a recommendation to a retail customer. Any recommendation of a securities transaction or investment strategy involving securities (including account type recommendations) must now be made in the best interest (Reg BI) of the retail customer at the time the recommendation is made, without placing its own financial or other interest ahead of the retail customer’s interest. This is a significant change from the current obligation of a broker to have a reasonable belief that an investment is suitable for a customer. Brokers are now required to provide to retail customers prior to or at the time of the recommendation a written disclosure document involving four (4) components: (i) the obligation to describe the terms of the customer relationship; (ii) the obligation to exercise reasonable diligence, care, and skill when making a recommendation; (iii) the obligation to address conflicts of interest; and (iv) the obligation to established written procedures reasonably designed to achieve compliance.

The SEC has also mandated that broker-dealers and investment advisers complete and file in IARD and CRD a brief relationship summary, Form CRS, which is intended to further inform retail customers. Form CRS will become Form ADV Part 3 for investment advisers.

Regulation BI – SEC Risk Alert
SEC Form CRS Relationship Summary – Fed Register
Investment News – Questioning Jay Clayton’s “Good Faith Effort”
SEC FAQs – Regulation BI
SEC FAQs – Form CRS

COVID-19 is a Catalyst for Business Innovation

The global financial crisis led to re-thinking payments, money, and broadening the scope of value that can be transferred. COVID-19 may lead to re-thinking the way we work and do business. The quarantine has opened us up to the new future of work. COVID-19 will undoubtedly accelerate the convergence of digital and physical. This disruption in the way we work might soon affect real estate as there could be a significant drop in the demand for office space. It’s believed that by the end of this year, there will be a significant increase in businesses that are piloting projects by working remotely. Businesses will suddenly recognize the huge savings of this cultural shift and will jump-start the transition as such practices are accepted as professional and slowly become the new standard. This will have a disruptive ripple effect on many sectors of the economy.

Read More >

Investors Remain Front of Mind at the SEC

SEC Chairman Clayton announced on Thursday, April 2 that the Commission is not delaying the final compliance date for Regulation Best Interest (Reg BI). In his statement, Clayton said “The interests of these individuals—our long-term Main Street investors—are the lens through which we evaluate whether we are effectively advancing the SEC’s mission.” Firms that were hoping for a delay of the June 30 deadline as a result of the current socio-economic conditions of COVID-19 are now officially on notice: The clock is still ticking.

Also of note in the statement was guidance regarding the focus of the regulators in the first wave of examinations that will occur following the June 30. Chairman Clayton said the following about upcoming releases the industry can expect:

“During the initial period following the compliance date, SEC examiners will be focusing on whether firms have made a good faith effort to implement policies and procedures necessary to comply with Reg BI, while also providing an opportunity to work with firms on compliance and other questions. SEC staff in the Office of Compliance Inspections and Examinations has informed me that they will be issuing two Risk Alerts in the coming days to provide additional information. One provides broker-dealers with specific information about the scope and content of initial examinations for Reg BI. The other provides broker-dealers and investment advisers with similar information with respect to Form CRS.”

You can read the full text of the statement here >

What is the CARES Act?

Help is on the way. With many of our clients struggling with business disruptions, we know the hard decisions you face every day, especially about whether to lay off employees. The Coronavirus Aid, Relief, and Economic Security Act (CARES) is a financial stimulus package designed to help. Small businesses will be able to get a loan of up to $10 million to stay afloat to help offset the financial challenges created by the COVID-19 pandemic. The CARES Act is now law, but there are still many questions on timing and administration. However, it’s important to understand that significant financial relief is on its way.

As you read about these measures, while weighing heavy decisions about what steps to take next with your business or employees, we encourage you to reflect if these forthcoming provisions can impact those choices.

Small Business Loans with eight weeks of covered costs forgiven

A key piece of the largest relief bill in recent memory is the more than $370 billion in funding for small businesses. Businesses with fewer than 500 employees are eligible for up to $10 million in loans, which can be used for payroll and other expenses, such as insurance premiums, mortgage interest, rent or utilities.

The loans, available at financial institutions currently extending SBA loans and other non-traditional lenders, would be completely forgiven if the employer continues to keep the employees or hires back those who already have been laid off, and uses the funds for covered expenses.

Recipients of a loan made under the Paycheck Protection Program will be eligible for loan forgiveness in an amount equal to the sum of the following costs incurred and payments made during an eight-week period beginning on the date of the loan origination:

Credits for retaining employees

Another bright spot for qualified business owners would be an employee retention credit, giving eligible employers a tax credit for keeping American workers employed during the COVID-19 crisis. Employers may be eligible for a refundable credit of up to 50% of qualified wages up to $10,000 per employee against applicable employment taxes.

Please note: The CARES Act employer credits cannot be combined with Small Business Administration (SBA) loans. The details on all of this can be complex. We will be posting updates regularly to keep you informed as the situation unfolds.

Other relief efforts proposed include:

• Recovery rebates for individuals
• Direct payments to individuals, based on their 2019 tax filing returns, or their 2018 tax filings, if 2019 has yet to be filed
• Delayed employer payroll taxes
• Would allow employers to defer payment of the employer share of the Social Security tax (6.2%) paid over the following two years, with half of the amount required to be paid by Dec. 31, 2021 and the other half by Dec. 31, 2022; employers would still be responsible for FICA tax on employee wages
• Relief for retirement plan participants impacted by COVID-19:
• Enhanced loan availability and relief for outstanding loan repayments
• Allows COVID-related distributions and waived early withdrawal penalty
• Waived Required Minimum Distribution (RMD) for 2020 calendar year
• Coverage of COVID-19 diagnostic testing by health plans at no charge
• Clarifies that COVID-19 diagnostic testing will be covered at no charge to health plan members if the developer requests emergency authorization from the FDA or if the test is developed and authorized by the state even if the test has not received approval from the FDA.
• Expansion of unemployment insurance
• Additional financial assistance to those on unemployment for qualifying individuals, as well as extended time for unemployment benefits

Next for the CARES Act

Now that it’s been signed into law, our government and regulatory bodies will have a period of time to issue further guidance to let companies such as Paychex know how to interpret the law.

The process and timing associated with getting access to the funds associated with the CARES Act is one of many unanswered questions that require further discussion with our contacts at the Small Business Administration and the IRS. Be confident that our compliance and legal teams are in active communication with our contacts at these agencies and will update you as soon as instructions are available.

We expect a chaotic few weeks before the processes for the SBA loans are established and implemented. In the interim, if you need access to capital you could consider your Financial institution or our trusted partner, Biz2Credit, that specializes in helping businesses obtain funding.

Finally, the CARES Act increases the maximum 401(k) loan that may be taken from a 401(k) account to $100,000 (formerly $50,000) as a short-term opportunity to gain access to cash.

As you navigate these unprecedented times, Paychex has services to guide you through that include an HR representative that can help you stay compliant. Please reach out to me directly with any questions or concerns at (646) 228-5529 or edrivas@paychex.com.

SDDco SERVICE OF THE MONTH:

ADVISOR SERVICES FOR PRIVATE EQUITY FIRMS

SDDco-PC customizes back-office services to your business needs and can handle your accounting and bookkeeping needs on a monthly, bi-weekly or weekly basis. Retainer engagements include scheduled on-site visits and continuous accessibility and assistance.

IN THE SPOTLIGHT

Keep a lookout for us at upcoming conferences!

• FINRA ANNUAL
• Washington, DC | May 12-14, 2020
• Register Now: https://www.finra.org/events-training/conferences-events/2020-finra-annual-conference
• NSCP National
• Baltimore, MD | Oct 19-21, 2020
• Register Now: https://national.nscpconferences.org
• FINRA Small Firm
• Santa Monica, CA | TBD

Let’s try to connect!

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The information provided should not be construed as legal advice and it is not intended to be a substitute for professional consultation. Please contact a financial services professional, such as SDDco or otherwise, if you have questions regarding the regulatory and compliance industry. This email may constitute an advertisement under U.S. law.

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