On April 18, 2018, the Securities and Exchange Commission (SEC) voted to propose a package consisting of rules and interpretations with a focus on enhancing the quality and transparency of investors’ relationships with broker-dealers and investment advisers. The release was entitled, “Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers” and was issued in connection with two proposed rules: 1 – the proposed “Regulation Best Interest (RBI); and 2 – a proposed Form Client Relationship Summary (Form CRS) for retail clients of both investment advisers and broker-dealers.1 All investment advisers subject to the Advisers Act, including wealth managers, institutional broker-dealers and private fund advisers should be affected by this proposal as it seeks to consolidate in one place all the relevant attributes of the federal fiduciary standard applicable to investment advisers. There will be a public comment period open for 90 days following the publication of the proposal in the Federal Register.2

What this means

The two proposed rules seek to address retail investor confusion about relationships that they may have with investment advisers and any harm that may result from that. The SEC has surmised that retail investors do not fully understand the differences between investment advisers and broker-dealers, leading them to choose the wrong kind of adviser for their needs, or to receive advice that is not in their best interest.3 The two proposed rules seek to clarify the standards of conduct investment advisers owe to their clients, provide transparency, and enhance investor protections while preserving for retail customers access to a broad range of investment products.4

  1. Regulation Best Interest (RBI):5

When making recommendation to a retail investor, a broker-dealer’s duty would be to act in the client’s best interest, and not put any financial or other interest of the broker-dealer ahead of the retail investor. The proposal requires the broker-dealer to comply with three specific obligations:

  • Disclosure Obligation – disclose the key facts about the relationship to the retail customer, including material conflicts of interest.
  • Care Obligation – exercise reasonable diligence, care, skill and prudence to understand the product, the suitability of the product for the retail investor, and have a basis to believe that the transactions are in the best interest of the retail investor.
  • Conflict of Interest Obligation – establish, maintain and enforce policies and procedures designed to identify, disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives, or other sources.
  1. Form Client Relationship Summary (Form CRS):6

Investment advisers and broker-dealers would be required to provide retail investors with a relationship summary. The disclosure (standardized and 4 pages maximum) would highlight key differences in the services offered, the legal standards of conduct that apply, the fees an investor may pay, and certain conflicts of interest that may exist. Investment advisers and broker-dealers would also have to disclose their registration status in any communications with investors.

The SEC confirmed that an investment adviser owes a fiduciary duty to its clients, one that the Supreme Court found exists within the Advisers Act. This proposal is meant to reaffirm and clarify certain aspects of that fiduciary duty.

Conclusion

 The SEC argues that the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers.7 SEC Chairman Jay Clayton stated, “…we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct.”8 There have however already been critical comments from some in the Securities industry. At an industry event in San Diego on April 25, Joe Borg, President of the North American Securities Administrators Association indicated that for the last eight years state securities regulators had been waiting for a “fiduciary” proposal, and though it was a “good positive first step” the proposal did not “raise the suitability standard in a measurable way.”9 Blaine Aiken, executive chairman of the fiduciary education firm Fi360 stated that having a “fiduciary best interest standard” under the Investment Advisers Act and a “non-fiduciary best interest standard” under the SEC’s proposed RBI “will be problematic,” and confusing to investors.10 It is anticipated that certain statements in the proposal will draw close scrutiny and comment during the course of 90 day review period as established by the SEC.11

 

References

  1. “SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals,” U.S. Securities and Exchange Commission, Press Release, April 18, 2018. Access at: https://www.sec.gov/news/press-release/2018-68.
  2. “SEC Releases Proposed Adviser Conduct Standard and Request for Comment on Enhancing Adviser Regulations,” Ropes & Gray LLP, April 23, 2018. Access at: https://www.lexology.com/library/detail.aspx?g=51a350c4-0a30-4abf-b5fb-0faf497236b8.
  3. “SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals,” U.S. Securities and Exchange Commission, Press Release, April 18, 2018. Access at: https://www.sec.gov/news/press-release/2018-68.
  4. Ibid
  5. Ibid
  6. Ibid
  7. Ibid
  8. Ibid
  9. “SEC Standard of Conduct Proposal Faces ‘Arduous Path’: Fi360’s Aikin,” ThinkAdvisor, April 25, 2018. Access at: https://www.thinkadvisor.com/2018/04/25/sec-standard-of-conduct-proposal-faces-arduous-pat/?slreturn=20180326091809.
  10. Ibid
  11. “SEC Releases Proposed Adviser Conduct Standard and Request for Comment on Enhancing Adviser Regulations,” Ropes & Gray LLP, April 23, 2018. Access at: https://www.lexology.com/library/detail.aspx?g=51a350c4-0a30-4abf-b5fb-0faf497236b8.

 

Newsletter Author: Venetia Woo, Mairi Bryan

Newsletter Contact Person: Venetia Woo

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

Disclaimer

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