SEC proposed standards of conduct for investment advisers and broker dealers

Published: 23 April 2018


On April 18, the US Securities and Exchange Commission issued three documents regarding the standards of conduct for broker-dealers and investment advisers. Proposed Regulation Best Interest and proposed Form CRS – Relationship Summary are somewhat specific and relate to obligations broker-dealers and investment advisers have towards their retail clients. Proposed Investment Adviser Interpretation Regarding Standard of Conduct for Investment Adviser discusses the standards of conduct applicable to investment advisers and suggests three areas of “potential enhancements to their legal obligations by considering areas where the current broker-dealer framework provides investor protections that may not have counterparts in the investment adviser context.”

In the Proposed Investment Adviser Interpretation the SEC intends to reaffirm and in some cases clarify, “certain aspects of the fiduciary duty that an investment adviser owes to its clients under section 206 of the Advisers Act.” The release discusses a number of aspects of the fiduciary duty that an adviser owes to its clients including an adviser’s duties of care, to provide advice in the best interests of clients, seek best execution, to act and provide advice and monitoring over the course of the relationship with a client, and loyalty. The SEC is also asking for comments regarding areas of enhanced adviser regulations. The enhanced regulations are based on existing standards for broker – dealers, including requirements for licensing and continuing education, financial responsibilities and providing account statements to clients.

Under Regulation Best Interest, the SEC proposes that broker-dealers that make transaction recommendations to retail customers, would have an obligation to act in the best interest of the customer “at the time a recommendation is made without placing the financial or other interest of the broker-dealer or natural person who is an associated person making the recommendation ahead of the interest of the retail customer.” The SEC suggests relieving broker-dealer from this obligation if the broker dealer a. “before or at the time of such recommendation reasonably discloses to the retail customer, in writing, the material facts relating to the scope and terms of the relationship, and all material conflicts of interest associated with the recommendation;” b. the broker-dealer “in making the recommendation, exercises reasonable diligence, care, skill, and prudence;” and c. “the broker-dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations” and its financial incentives.

Under Form CRS- Relationship, the SEC proposes to require investment advisers and broker dealers to  provide on a standard, short-form a disclosure to inform retail investors “about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events.  Retail investors would receive a relationship summary at the beginning of a relationship with a firm, and would receive updated information following a material change.” The SEC is also proposing to “reduce investor confusion in the marketplace” by restricting broker-dealers from using the term “adviser” or “advisor” in certain circumstances and requiring broker-dealers and investment advisers to disclose to retail investors, “the firm’s registration status with the Commission and an associated natural person’s and/or supervised person’s relationship with the firm.”

Comments on these proposed requirements are due within 90 days after publication in the Federal Register.  Please contact Uzi Rosha if you are interested in contributing to a response to these releases.