On June 5, 2019, the Securities and Exchange Commission (SEC) approved a set of rules and interpretations targeting the standards of conduct to which broker-dealers and investment advisers will be held. These actions include new Regulation Best Interest, the new Form CRS Relationship Summary and two separate interpretations under the Investment Advisers Act of 1940, as amended (Advisers Act).
Regulation Best Interestmodifies the standard of conduct for broker-dealers, which will now be required to act “in the best interest of their retail customers when making a recommendation,” as opposed to operating purely on the basis of suitability. The regulation also makes it clear that a broker-dealer may not place its own financial interests ahead of those of retail customers. Broker-dealers will be required to establish, maintain and enforce policies and procedures reasonably designed to comply with the rule.
Moreover, the newly-adopted Form CRS Relationship Summarywill require investment advisers and broker-dealers to provide retail investors with a summary containinginformation about (1) the services the firm offers, (2) fees, (3) costs, (4) conflicts of interest, (5) legal standard of conduct and (6) whether the firm and its financial professionals have disciplinary history. While facilitating layered disclosure, the format of the relationship summary allows for comparability among the two different types of firms in a way that is distinct from other required disclosures.
Both Regulation Best Interest and Form CRS will be effective 60 days after they are published in the Federal Register with a transition period lasting until June 30, 2020.
In addition, the SEC also published an interpretation that reaffirms and clarifies its view of the fiduciary duty that investment advisers owe to their clients. The interpretation generally elaborates on established principles behind the duties of loyalty and care, and clarifies that while the application of the fiduciary duty can be affected by the defined scope of the adviser-client relationship, it cannot be waived as per section 215 of the Advisers Act. Finally, the SEC issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion under the Advisers Act, which is intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser within the meaning of the Advisers Act. Specifically, it states that a broker-dealer’s advice as to the value and characteristics of securities, or as to the advisability of transacting in securities is included in the “solely incidental” prong of this exclusion if the advice is provided in connection with, and is reasonably related to, the broker-dealer’s primary business of effecting securities transactions. Both interpretations will become effective upon publication in the Federal Register.
Click here to read the SEC release.