SEC Adopts Regulation Best Interest, Form CRS; Also Issues Interpretive Releases on IA Fiduciary Duty and Solely Incidental Exception

By a 3-1 vote, on June 5, 2019, the SEC acted to provide a new regulatory framework to help retail, or main street, investors understand the distinctions between broker-dealers and investment advisers, particularly the standards of conduct owed by each. Opening remarks by SEC Chair Jay Clayton noted that as markets have developed over the last century, this issue has grown in importance with more than 44 million US households having retail investment accounts.

Clayton cited that the obligations of financial professionals to those they service has been the ongoing concern of the SEC since its inception. Today, he remarked, “we elevate, enhance and clarify these obligations in a comprehensive manner.” Chair Clayton further noted that past delays in acting have only led others to develop strident opposition.

Despite these “head winds,” Clayton stated that the SEC made it here through a “mix of law, duty, courage, conviction and commitment.” He expressed his support to Commission staff for working on two objectives: (1) bringing required standards of conduct and mandated disclosures in line with reasonable expectations and (2) preserving the availability of customer choice and levels of service that match different needs.

The adoption of Best Interest Standards for broker-dealers likely creates the most significant industry re-tooling. Regulation Best Interest enhances the broker-dealer standard of care requiring broker-dealers to act in best interest of retail customers. This draws from key fiduciary principles and cannot be managed by disclosure alone. Indeed, the rule will require disclosures, a care obligation to place customer interests first, an obligation to mitigate conflicts of interest, and compliance policies and procedures to manage the implementation of the standard of care.

Form CRS will have broad application across broker-dealers and investment advisers, providing sunlight on required standards of conduct, fees and services, plus any disciplinary history. Clayton again noted that while critics express concerns, that he believes Form CRS will be a positive step forward as part of this new framework.

In discussing the Interpretive Releases, SEC staff noted its goal of providing greater information to assist with the new framework, specifically answering that nothing within it should be considered to water down the fiduciary duty.

As the SEC makes public the written text of the Final Rules and Interpretive Releases, CSS will have more information on how to implement the new requirements.

What’s Next?

The rules and forms will be effective 60 days from publication in the Federal Register and the interpretations will be effective upon publication in the Federal Register.

By June 30, 2020, registered broker-dealers must begin complying with Regulation Best Interest, and broker-dealers and investment advisers registered with the Commission will be required to prepare, deliver to retail investors, and file a relationship summary.


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