SEC Adopts New Rules and Interpretations

On June 5, 2019, the Securities and Exchange Commission (SEC) voted to adopt a package of rulemakings and interpretations affecting broker-dealers and investment advisors. The actions are designed to:

  • Enhance and clarify the standards of conduct applicable to broker-dealers and investment advisors;
  • Help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances; and
  • Foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.

The package includes the new Regulation Best Interest, the new Form CRS Relationship Summary and two separate interpretations under the Investment Advisors Act of 1940. Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance. The SEC’s interpretations under the Advisors Act will become effective upon publication in the Federal Register.

The following highlights the SEC’s proposals:

Regulation Best Interest
  • Regulation Best Interest imposes a new standard of conduct specifically for broker-dealers and requires broker-dealers to act in the best interest of its retail customers.
  • There are four components to Regulation Best Interest:
    1. Disclosure Obligation:
      Requires broker-dealers to disclose material facts about the relationship and recommendations, including capacity in which the broker is acting, fees, type and scope of services provided, conflicts, limitations on services and products and whether the broker-dealer provides monitoring services.
    2. Care Obligation:
      Requires broker-dealers to exercise reasonable diligence, care and skill when making a recommendation to a retail customer including understanding the retail customer’s investment profile and considering only recommendations that are in the customer’s best interest. This would include account recommendations, such as recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and recommendations to take a plan distribution as well as implicit “recommendations to hold” that result from agreed-upon account monitoring.
    3. Conflict of Interest Obligation:
      Requires broker-dealers to have written policies and procedures reasonably designed to identify and disclose or eliminate conflicts of interest, such as to prevent limited product menu, offering only proprietary products or eliminating non-cash compensation based on sale of specific securities or types of securities within a limited amount of time (i.e., sales contests).
    4. Compliance Obligation:
      Requires broker-dealers to establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole. 

     

Form CRS Relationship Summary
  • Firms will be required to summarize certain relationship information in a standardized Q&A format to allow retail investors to compare firms.
  • Information in the Relationship Summary will include a description of services, fees and costs, conflicts of interest, legal standard of conduct, whether or not the firm and its financial professionals have disciplinary history and a link to the SEC’s investor education website, www.investor.gov, which contains additional educational information.

Investment Advisor Interpretations
  • An investment advisor owes a fiduciary duty to its clients under the Advisors Act that is principles-based and applies to the entire relationship between an investment advisor and its client. The final interpretation reaffirms, and in some cases clarifies, certain aspects of the federal fiduciary duty that an investment advisor owes to its clients. 
  • The broker-dealer exclusion under the Advisors Act excludes a broker or dealer whose performance of advisory services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation for those services from the definition of an investment advisor. The final interpretation confirms and clarifies that a broker-dealer’s advice as to the value and characteristics of securities or as to the advisability of transacting in securities falls within 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. 

For further information, read the SEC’s press release.

SEC Adopts New Rules and Interpretations 2019-06-10T00:00:00.0000000 /insights/publications/compliance-and-regulatory-consulting/sec-new-rules-broker-dealer-investment-advisors /-/media/assets/images/publications/featured-images/2019/compliance-and-regulatory-consulting/sec-new-rules-broker-dealer.ashx publication {DA6CC51B-740E-439A-B283-2BBFB5326BAA} {EBC1AB28-1393-493C-AF32-19B3B0B6E171}

Related Services

U.S. Regulation

Comprehensive support for asset managers registering in the U.S.

U.S. Regulation

Insights