Evolution of Fiduciary Rules Begins to Take Shape in SEC

On April 18, 2018, the SEC voted to propose several new rules and reforms related to fiduciary standards. The package intends to raise and clarify standards of conduct for broker-dealers and investment advisers, and to provide clarity regarding fees, conflicts and other material matters. It also aims to ensure that the standards can be understood by retail investors, are implementable by industry professionals, and will be enforceable by the regulators.

First, Proposed Regulation Best Interest would require broker-dealers to act in the best interest of its retail customers; a broker-dealer would not be allowed to put its financial interests ahead of the interests of a retail customer’s in making recommendations. While some of the Commission members felt the naming of this regulation could confuse retail investors, overall, they felt it was a step in the right direction.

The Commission also generally supported the implementation of Form CRS (Customer Relationship Summary), a disclosure document of no longer than four pages, that serves to describe principal services offered, legal standards of conduct that apply, fees customers will pay, and material conflicts. Form CRS is geared toward providing retail investors with easy-to-understand information that would supplement more detailed disclosures.

The proposal will also include labeling rules pertaining to the use of the terms “advisor” and “adviser.” Certain broker-dealers would be restricted from using the terms as part of their name or titles with retail investors. The staff discussed how the advisor/adviser terminology has been confusing or misleading for many retail investors, and in its proposal, indicated that restricting use would provide clarity as to who is providing the advice.

Next Steps

The SEC is opening the proposals to public and industry comment for 90 days to ensure the initiatives are clear, implementable, and enforceable. Several of the Commission members felt more work needs to be done to reduce ambiguity and add further clarity, but generally they were in support of the spirit of the 1,000-page proposal and in receiving public comments to improve upon it. The SEC developed a two-page tear sheet meant to summarize the hefty proposal so that retail investors can engage in the discussions and the commission can consider the implications of the proposals on the public. The Chairman further recommended that the next steps should focus on Form CRS, the Relationship Summary document, which will be a daunting task in and of itself.

The full proposal and related materials are available here. Ascendant recommends you discuss the proposals with your compliance consultant and encourages your comments.


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