SEC Adopts New Rules and Interpretations for Investment Advisers and Broker-Dealers

June 7, 2019

On June 5, 2019, the Securities and Exchange Commission (the “Commission”) adopted a set of rulemakings and interpretations governing the duties investment advisers and broker-dealers have to their clients. The Commission adopted four items: Regulation Best Interest; a new Form CRS Relationship Summary (“Form CRS”); an interpretation under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) of the fiduciary duties of an investment adviser; and an interpretation of the “solely incidental” prong of the broker-dealer exclusion of the Advisers Act. These rulemakings and interpretations are briefly summarized below.

Regulation Best Interest

Regulation Best Interest (“Regulation BI”) “enhances” the suitability standard of conduct for a broker-dealer when it makes recommendations to a retail customer of any securities transaction or investment strategy involving securities. Regulation BI includes obligations with regard to disclosure, the duty of care, conflicts of interest, and compliance. Specifically, Regulation BI:

  • In addition to the “suitability” standard, a broker-dealer must now act in the best interest of the retail customer at the time a recommendation is made.
  • Prohibits a broker-dealer from placing its own interests ahead of the customer’s interests.
  • Requires a broker-dealer to establish and enforce policies and procedures that identify and disclose material conflicts of interest.
  • Requires a broker-dealer to mitigate or eliminate a conflict of interest where it is determined that disclosure is insufficient to reasonably address the conflict.
  • Requires a broker-dealer to establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with the regulation.

Form CRS Relationship Summary

Registered investment advisers and registered broker-dealers will be required to deliver Form CRS to retail investors at the beginning of the relationship. Form CRS will summarize information about:

  • Services that the firm offers to retail investors.
  • Fees and costs that retail investors will pay.
  • Specified conflicts of interest and standards of conduct.
  • The legal disciplinary history of the firm and its financial professionals.
  • How to obtain additional information about the firm.

SEC Interpretation Regarding Standard of Conduct for Investment Advisers

The Commission has issued an interpretation reaffirming in a single place longstanding interpretations of an adviser’s fiduciary duties and seeking to clarify certain aspects of the duties that an investment adviser owes to its clients under the Advisers Act.

“Solely Incidental” Interpretation

The Commission has issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion under the Advisers Act, which is intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser within the meaning of the Advisers Act.

Regulation BI 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. The Commission’s interpretations under the Advisers Act will become effective upon publication in the Federal Register.

We will be communicating in more detail about these developments.