SEC Rolls Out Best Interest, Fiduciary Proposal

By Andrew Remo • April 19, 2018 • 0 Comments
While the Securities and Exchange Commissioners were hardly unanimous in their assessment, they voted 4-1 to release for public comment a set of proposals to “enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.”

The commissioners, at the end of an open meeting on April 18, voted to release for public comment a comprehensive package of proposals designed to establish and new standards of conduct for broker-dealers (BDs) and investment advisers (IAs) when making recommendations for securities transactions or investment strategies to retail investors. The proposal covers recommendations to retail investors for securities transactions in retirement accounts, including recommendations to rollover securities in retirement plans to IRAs.

The package is divided into two new rules and one new piece of interpretative guidance. The first rule would establish a “best interest” standard of care for broker-dealers when a recommendation is made. SEC staff described the definition of recommendation in the proposal as one based upon and building from already established FINRA guidance. Broker-dealers would have three specific obligations when making a recommendation: a disclosure obligation, a care obligation, and a conflict-of-interest obligation.

Under the disclosure obligation, the broker-dealer would have to disclose to the retail investor key facts about the relationship, including material conflicts of interest. Under the care obligation, the broker-dealer would have to exercise reasonable diligence, care, skill, and prudence to understand the securities product being recommended and have a reasonable basis to believe the securities product is in the retail investor’s best interest, and have a reasonable basis to believe that the series of securities transactions are in the retail investor’s best interest. Under the conflict of interest obligation, the broker-dealer would have to have reasonably designed policies and procedures to at a minimum identify and disclose conflicts of interest.

Best Interest Proposed Regulation

The second rule creates a new SEC Form CRS which both broker-dealers and investment advisers would be required to provide to retail investors that describes the relationship in plain English. This form cannot be more than four pages long and could be provided digitally to the retail investor. The rule would prohibit broker-dealers who are not registered investment advisers from using the terms “adviser” and “advisor” as part of their name or title.

Proposed Form CRS Relationship Summary

In fact, a good place to start in your own analysis is the Form CRS, or “Customer/Client Relationship Summary,” which was a point of emphasis by SEC Chairman Clayton, who acknowledged that “these paper mock-ups reflect a traditional approach to how firms could choose to communicate with retail investors.” The SEC said it recognized that the inclusion of graphic presentations can be more effective than text-only presentations, and repeated that they are proposing to allow BDs and IAs to use electronic communications and graphics to meet their Form CRS obligations, “provided that such presentations are true to the content requirements and page limits of Form CRS.” Examples can be found below:

Form CRS Mock-up – Dual Registrant
Form CRS Mock-up – Standalone Broker-Dealer
Form CRS Mock-up – Standalone Investment Adviser

The SEC will also issue guidance that will reaffirm and clarify the fiduciary duty within the Advisers Act that an investment adviser owes to its clients.
  

Proposed Investment Adviser Interpretation

In total, the comprehensive package will be more than 1,000 pages long with more than 1,000 footnotes. The public will have 90 days to comment on the extensive material contained in the proposal after it is formally published in the Federal Register. The American Retirement Association will closely review the proposal when it is released and provide its own comments on it to the SEC.

Andrew Remo is the American Retirement Association’s Director of Legislative Affairs.