The SEC Proposes Rules and Interpretations to Address Relationships Between Retail Investors and Investment Professionals
The Securities and Exchange Commission (Commission) has been considering issues relating to retail investor relationships with investment professionals for several years. A study was undertaken following passage of the Dodd-Frank Act, resulting in certain recommendations in a 2011 report. However, no rule proposals were presented due to differences in opinion regarding the path forward among the Commissioners.
In June 2017, Chairman Jay Clayton sought public input on a variety of issues associated with standards of conduct for investment professionals. The Commission published a press release on April 18, 2018 that summarizes proposed rules and interpretations that were based on a review of those issues by the Commission and the Commission staff. The press release describes proposed Regulation Best Interest, proposed interpretations regarding an investment adviser’s fiduciary duty, proposed Form CRS and proposed restrictions regarding the use of certain names and titles.
Regulation Best Interest
Under Regulation Best Interest, a broker-dealer making a recommendation to a retail customer would have a duty to act in the best interest of the customer at the time the recommendation is made, without putting the financial or other interests of the broker-dealer ahead of the interests of the customer. This duty would be discharged by:
- disclosing to the customer the key facts about the relationship, including material conflicts of interest;
- exercising reasonable diligence, care, skill and prudence to (i) understand the product, (ii) have a reasonable basis to believe that the product is in the customer’s best interest, and (iii) have a reasonable basis to believe that a series of transactions is in the customer’s best interest; and
- establishing, maintaining and enforcing policies and procedures reasonably designed to identify and then at a minimum disclose and mitigate, or eliminate, material conflicts of interest from financial incentives (other material conflicts of interest must be at least disclosed).
Investment Adviser Fiduciary Duty
The Supreme Court has found that a fiduciary duty to investment advisory clients exists within the Investment Advisers Act of 1940. The Commissions’ proposed interpretation reaffirms, and in some cases, clarifies, certain aspects of the fiduciary duty that an investment adviser owes to its clients.
Investment advisers and broker-dealers, and their associated persons, would be required to provide retail investors with a relationship summary. This short-form disclosure would highlight key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.
Use of Names and Titles
Certain broker-dealers and their associated persons would be restricted from using, as part of their names or titles, the terms “adviser” and “advisor,” which are so similar to “investment adviser” that their use may mislead retail customers into believing that the firm or the investment professional is a registered investment adviser.
The public will have the opportunity to provide comments on these proposals for a period of ninety (90) days.