The Securities and Exchange Commission has proposed a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers. These changes will also preserve access to a variety of types of advice relationships and investment products. Generally, the proposed regulations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers that provide for clear disclosures, encouraging exercising due care, and addressing conflicts of interest.
This proposed rule, entitled Regulation Best Interest, would require broker-dealers to act in the best interest of retail customers when making recommendations of securities transaction or investment strategies involving securities. Regulation Best Interest makes it clear what a broker-dealer’s standard of conduct toward customers must be and that a broker-dealer may not put its financial interests first when making recommendations. Specifically, a broker-dealer would be required to comply with each of the following obligations:
- Disclosure: disclose to the retail customer the key facts about the relationship, including material conflicts of interest,
- Care: exercise reasonable diligence, care, skill, and prudence to understand the product, have a reasonable basis to believe that the product is in the customer’s best interest, and have a reasonable basis to believe a particular series of transactions is in the customer’s best interest.
- Conflict of interest: establish, maintain, and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest.
The SEC is also proposing an interpretation to reaffirm and clarify its views of the fiduciary duty that investment advisers owe their clients. This should provide greater clarity about investment advisers’ legal obligations to their clients.
In addition, the SEC has voted to propose a new short-form disclosure document that will describe customer/client relationship summaries. This new Form CRS will provide retail investors with simple, easy-to-understand information about their relationship with their investment professional and will supplement other, more detailed disclosures. Additional information can be found in Form ADV for advisers, and for broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship will become required under Regulation Best Interest.
The public comment period for these proposed changes will last for 90 days from their publication in the Federal Register. The complete set of comment solicitations can be read in the full releases concerning these proposed rules. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the reference number for the specific rule in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, remember to include the reference number for the specific rule to which your comment applies.
Sources:
SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals (www.sec.gov)
Regulation Best Interest (www.sec.gov)
Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation (www.sec.gov)
Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles (www.sec.gov)
