Overview
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On April 18, the Securities and Exchange Commission (SEC or Commission) voted 4-to-1 to propose a set of new rules intended to: (1) create a “best interest” standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer (collectively, broker-dealers or brokers, unless noted otherwise herein);[1] (2) improve disclosure through summary forms and clarify relationships among broker-dealers, advisers, and their retail investor customers;[2] and (3) clarify the fiduciary standards for advisers under the Investment Advisers Act of 1940 (Advisers Act).[3]
The SEC’s proposed best interest standard appears to be directed at the same goal as the “impartial conduct standards” included in the Department of Labor’s (DOL) Best Interest Contract (BIC) Exemption,[4] Principal Transactions Exemption,[5] and amendments to previously granted exemptions[6] in connection with the adoption of the DOL Fiduciary Rule.[7] It would require broker-dealers, when recommending any securities transaction or investment strategy involving securities to a retail customer, to act in the best interest of the retail customer at the time of the recommendation without placing the financial or other interest of the broker-dealer ahead of the retail customer’s interest. Unlike the DOL’s impartial conduct standards, the SEC’s proposed best interest standard would apply to broker-dealers when making recommendations to all retail customers, not just retirement investors, and would be enforced by the SEC.
As part of the proposed rule package, the SEC published for comment a short-form customer or client relationship summary (Form CRS) brokers would be required to use in setting out the material facts of the relationship with their clients. Proposed Form CRS also contains a set of questions for customers to ask their brokers before agreeing to a recommendation.[8] In addition, the proposed rule would prohibit a broker-dealer from using as part of a name or title the term “adviser” or “advisor” unless the broker-dealer is registered as an investment adviser and is providing investment advice under the Advisers Act.[9] They may not, for example, use the restricted words if they only offer brokerage services to retail investors or if they are merely associated with a dually registered firm and do not provide investment adviser-supervised investment advice.
Comments on the proposed rule package must be submitted within 90-days after publication in the Federal Register. The SEC’s proposed best interest standard, Form CRS requirements, and titling restrictions are discussed in greater detail below.
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[1] See Regulation Best Interest, Release No. 34-83062 (Apr. 18, 2018). The proposed rule package has not yet been published in the Federal Register but is available on the SEC’s website. All references in this advisory are to the rule package as published on the SEC’s website.
[2] Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Release No. 34-83063 (Apr. 18, 2018) (Form CRS Relationship Summary).
[3] Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Release No. IA-4889 (Apr. 18, 2018).
[4] Best Interest Contract Exemption, 81 Fed. Reg. 21002-01 (April 8, 2016).
[5] Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, 81 Fed. Reg. 21089 (April 8, 2016).
[6] 81 Fed. Reg. 21208 (April 8, 2016); 81 Fed. Reg. 21181 (April 8, 2016); 81 Fed. Reg. 21139 (April 8, 2016); 81 Fed. Reg. 21147 (April 8, 2016).
[7] Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice, 81 Fed. Reg. 20945 (Apr. 8, 2016).
[8] Form CRS Relationship Summary, Appendix D (“Is a Brokerage Account Right for You?”).
[9] This proposed rule has the potential of requiring a financial professional to refer to herself by one title when speaking with certain customers and another title when speaking to others.
