United States: SEC Releases Proposed Adviser Conduct Standard And Request For Comment On Enhancing Adviser Regulations

On April 18, 2018, the SEC issued a release (the "Release"), entitled, "Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers" (the "Adviser Conduct Proposal"), along with a request for comment on "Enhancing Investment Adviser Regulations." The Release was issued in connection with two proposed rules that came out the same day: (1) the proposed "Regulation Best Interest" under the Securities Exchange Act of 1934 for broker-dealers, and (2) a proposed Form Client Relationship Summary for retail clients of both investment advisers and broker-dealers.

All investment advisers subject to the Advisers Act, including wealth managers, institutional shops, and private fund advisers, should take notice of the Adviser Conduct Proposal, as it seeks to consolidate in one place the salient attributes of the federal fiduciary standard applicable to investment advisers.

This Alert summarizes the Adviser Conduct Proposal, identifies certain aspects of the Adviser Conduct Proposal that we anticipate will generate significant interest and industry comment during the review period, and concludes by summarizing the request for comment on Enhancing Investment Adviser Regulations. We will provide a separate alert addressing Regulation Best Interest and the proposed Form Client Relationship Summary in the near future.

I. Summary of the Adviser Conduct Proposal

The stated objective of the Adviser Conduct Proposal is "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." Thus, the Adviser Conduct Proposal is not intended to create new or different obligations or requirements, but rather is an attempt to gather in one place existing components of the Advisers Act fiduciary duty.

The Adviser Conduct Proposal reaffirms that the Advisers Act fiduciary duty derives from common law principles. It draws heavily from SEC v. Capital Gains Research Bureau, Inc., the 1963 Supreme Court opinion commonly cited for having held that the Advisers Act imposes a fiduciary standard on registered investment advisers. The Adviser Conduct Proposal describes a two-pronged fiduciary standard that includes (1) a duty of care and (2) a duty of loyalty.

  • Duty of Care
    • The Adviser Conduct Proposal describes the duty of care as consisting of (i) the duty to act and provide advice that is in the best interest of the client, (ii) the duty to seek best execution of a client's transactions, and (iii) the duty to provide advice and monitoring.
    • The duty of care described in the Adviser Conduct Proposal requires an investment adviser to "make a reasonable inquiry into a client's financial situation, level of financial sophistication, investment experience, and investment objectives . . . and a duty to provide personalized investment advice that is suitable for and in the best interest of the client based on the client's investment profile." The Adviser Conduct Proposal also states that such profile must be updated from time to time, but is unclear regarding the extent to which an adviser has an affirmative duty to inquire regarding changed circumstances of the client.
    • The Adviser Conduct Proposal states that the cost of investment advice, including the cost of fees or compensation, would generally be an important factor that an investment adviser should consider when determining whether a security or strategy is in the best interest of a client. While the Release makes clear that other factors are also important, the Adviser Conduct Proposal may trigger additional review of fees and costs through a fiduciary lens.
    • The Adviser Conduct Proposal confirms investment advisers' existing obligations with respect to best execution as set forth in existing SEC guidance.
    • The Adviser Conduct Proposal states that an investment adviser must provide monitoring and advice at a frequency that is in the best interest of the client and consistent with the scope of services agreed to by the client and the adviser.
  • Duty of Loyalty
    • The Adviser Conduct Proposal describes the duty of loyalty as requiring that an investment adviser must put its clients' interests ahead of its own, must not unfairly favor one client over another, and must make full and fair disclosure of all material facts relating to the advisory relationship.
    • The Adviser Conduct Proposal also states that an investment adviser "must seek to avoid conflicts, and, at a minimum, make full and fair disclosure of all material conflicts of interest that could affect the advisory relationship."
    • In line with past enforcement actions, the Adviser Conduct Proposal confirms that an investment adviser may not favor proprietary accounts over client accounts (for example, in connection with allocations of investment opportunities) and may not favor certain client accounts that pay higher fee rates over other client accounts.
    • The Adviser Conduct Proposal also emphasizes the need for disclosure to be clear and understood by clients in order to satisfy Section 206 and the duty of loyalty. Disclosure must be sufficiently specific so that a client is able to understand the adviser's conflicts of interest and business practices well enough to make an informed decision (e.g., the SEC states that disclosure that a conflict "may" exist is not sufficient if the conflict actually exists). A client's informed consent can be either explicit or, depending on the facts and circumstances, implicit (although an adviser cannot infer consent if the facts and circumstances indicate that the client did not understand the nature and import of the conflict, i.e., the sophistication of the client matters). The SEC also noted that there may be circumstances with some complex or extensive conflicts where it may be difficult to provide disclosure that is sufficiently specific, but also understandable to clients.

II. Initial Observations on the Adviser Conduct Proposal

As noted above, the Adviser Conduct Proposal is intended to reaffirm and clarify the Advisers Act fiduciary duty, rather than create a new duty that did not exist under prior law. Much of the Adviser Conduct Proposal therefore consists of citations and recapitulations of well-settled principles. However, we anticipate that certain statements in the Adviser Conduct Proposal will draw close scrutiny and comment during the 90-day review period established by the Commission for the proposal.

We expect that industry commenters will seek clarification in particular on the extent to which investment advisers may satisfy their fiduciary duty through full and fair disclosure to their clients. The Adviser Conduct Proposal is ambiguous on this point. Specifically, it states that an investment adviser "cannot disclose or negotiate away, and the investor cannot waive, the federal fiduciary duty" and that "[d]isclosure of a conflict alone is not always sufficient to satisfy the adviser's duty of loyalty and section 206 of the Advisers Act," and contemplates that there may be cases "where full and fair disclosure and informed consent is insufficient," although the discussion accompanying these statements focuses on the quality of disclosure and whether an investor understood it, rather than whether an adviser can act in its own interest if such interest is properly disclosed. We do not believe the Commission intended the Adviser Conduct Proposal to signal a fundamental shift in their understanding of disclosure and informed consent as a means to address adviser conflicts, but clarity on this question would be welcome.

We also expect that industry commenters will seek clarification regarding the application of these standards to private funds and private fund investors. Although the Adviser Conduct Proposal is not addressed specifically to any one type of client relationship, many portions of the proposal seem to have been written primarily with separately managed account clients in mind.

We expect that the other rules proposed by the Commission will be controversial, based on the statements of the Commissioners at the April 18 open meeting. Thus, it is difficult to predict how soon the Commission may act on these proposals after the 90-day comment period, and whether the Commission may consider approving any of the proposals separately. We will keep you apprised of developments regarding the proposals.

III. Request For Comment on Enhanced Investment Adviser Regulation

In addition to setting forth the SEC's interpretation of the fiduciary standard applicable to investment advisers, the Release also requests comments on three discrete proposals, all of which are derived from regulations currently applicable to broker-dealers:

  • Federal Licensing and Continuing Education: The federal securities laws do not impose licensing or qualification requirements on investment advisers, though FINRA imposes such requirements on associated persons of broker-dealers. The SEC has requested comment on whether there should be federal licensing, qualification, and continuing education requirements for investment adviser representatives.
  • Provision of Account Statements: The federal securities laws do not require investment advisers to provide clients with account statements, though we believe that most advisers do so. The SEC has requested comment on whether advisers should be required to provide account statements setting forth the fees and expenses charged for advisory services.
  • Financial Responsibility: While Rule 206(4)-2 under the Advisers Act requires investment advisers with custody over client assets to maintain such assets with a qualified custodian, the federal securities laws do not impose capital requirements on investment advisers or require investment advisers to maintain a fidelity bond. Accordingly, the SEC has requested comment on whether investment advisers should be subject to financial responsibility requirements similar to those that apply to broker-dealers.

Industry comments on these potential regulations will be helpful. For example, insights from dual-registered advisers in the U.S., insights from registered advisers that are regulated under other regimes that impose similar requirements, insights from asset management firms describing potential burdens compared to potential benefits to clients, and insights from different types of advisory firms (institutional, retail, private fund advisers, and others) that may be differently impacted by these types of requirements would be helpful in addressing these potential new regulatory proposals.

IV. Comment Period

Comments may be submitted on the Adviser Conduct Proposal and the Enhanced Investment Adviser Regulation for 90 days following publication in the Federal Register. We expect that the other rules proposed by the Commission will be controversial, based on the statements of the Commissioners at the April 18 open meeting. Thus, it is difficult to predict how soon the Commission may act on these proposals after the 90-day comment period, and whether the Commission may consider approving any of the proposals separately. We will keep you apprised of developments regarding the proposals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Duane Morris LLP
Akin Gump Strauss Hauer & Feld LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Duane Morris LLP
Akin Gump Strauss Hauer & Feld LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions