SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals

SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals

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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.

 

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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