United States: SEC Proposes Standards Of Conduct For Broker-Dealers, Investment Advisers

In a first step toward developing standards for advice to retail customers, the Securities and Exchange Commission recently proposed rules and interpretive guidance intended to enhance investor protections while preserving investment choice and access.

The Securities and Exchange Commission (SEC) voted on April 18 to propose standards for broker-dealers and investment advisers when providing recommendations and investment advice to retail customers in a three-part package that includes

We are reviewing the text (1,000+ pages), but here are our first impressions.

What happened?

  • Following an open meeting, the SEC voted 4–1 to propose the package of rulemaking and guidance. Commissioner Kara Stein was the dissenting vote, and Commissioner Robert Jackson voted to move forward to begin consideration of the proposals while noting he did not support the package.
  • Chairman Jay Clayton emphasized that the package is intended to close the gap between investor expectations and current law while preserving access and choice. He also sees this proposal as addressing concerns about a patchwork of standards developing for retail investment advice.
  • The proposal will be subject to a comment period ending 90 days after the releases are published in the Federal Register.

What do we know about the proposal so far?

  • What is “Regulation Best Interest”?

    • Proposed Regulation Best Interest would require broker-dealers to act in the best interest of the retail customer when they recommend a securities transaction or investment strategies involving securities, without placing the broker-dealer’s or registered representative’s financial or other interest ahead of the customer’s interest.

      • The SEC has not proposed to define the term “recommendation,” and instead would look to existing guidance from the Financial Industry Regulatory Authority (FINRA) as to when a broker-dealer communication is viewed as a recommendation, including a recommendation about a rollover, or is excluded from FINRA Rule 2111 (e.g., general financial and investment information, descriptive information about an employer-sponsored retirement or benefit plan, certain asset allocation models, and interactive investment materials).
      • “Retail Customer” would be defined as a person, or the legal representative of the person, who receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer or registered representative, and uses the recommendation primarily for personal, family, or household purposes.
    • A broker-dealer would satisfy the best interest obligation if it satisfies three obligations:

      • Disclosure Obligation: The broker-dealer, prior or at the time of the recommendation, “reasonably” discloses to the retail customer, in writing, the material facts about the scope and terms of its relationship with the broker-dealer and all material conflicts of interest associated with the recommendation. The disclosure obligation would build upon disclosures required by Form CRS, but provide flexibility to broker-dealers in deciding how to provide the required disclosures.
      • Care Obligation: The broker-dealer would be required to exercise “reasonable diligence, care, skill, and prudence” to (1) understand the potential risks and rewards of the recommendation and have a reasonable basis to believe that the recommendation could be in the “best interest” of at least some retail customers; (2) have a reasonable basis to believe that the recommendation is in the “best interest” of the retail customer to whom it is made based on the retail customer’s investment profile and the potential risks and rewards associated with the recommendation; and (3) have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s “best interest” when taken together in light of the retail customer’s investment profile. The components of the care obligation are intended to incorporate and build upon existing reasonable-basis, customer-specific, and quantitative suitability obligations under the Securities Exchange Act of 1934 and FINRA Rule 2111.
      • Conflicts of Interest Obligation: The broker-dealer would be required to establish, maintain, and enforce written policies and procedures reasonably designed to identify and (1) at a minimum disclose, or eliminate, all material conflicts of interest associated with the recommendation; and (2) disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with the recommendations. The SEC has not proposed prescriptive policies and procedures that broker-dealers must adopt, and instead has proposed to allow broker-dealers flexibility to decide on the appropriate approach.
    • Finally, the SEC asked for comment on whether it should revisit whether a broker-dealer’s exercise of investment discretion should be viewed as “solely incidental” to the business of a broker-dealer.
  • What are the Form CRS and titling requirements?

    • Proposed Form CRS (Customer/Client Relationship Summary) will require a maximum four-page form disclosure document for broker-dealers, investment advisers, and dual registrants when interacting with retail customers.

      • Firms would be required to describe the differences between brokerage and advisory services, including fees, conflicts, service levels, and standards of conduct, and include sample questions for investors to ask their financial professional to better understand the services offered.
      • Three sample Forms CRS are available here:

    • Titling requirements and restrictions will seek to address investor confusion about whether an investor is dealing with a broker-dealer or investment adviser and will prohibit the use of the terms “advisor” and “adviser” by someone who is not an investment adviser representative.
  • What does the Standard of Conduct for Investment Advisers consist of?

    • This release consists of a proposed interpretation of the “federal fiduciary standard” applicable to investment advisers under Section 206(1) and (2) of the Advisers Act. The interpretation seeks to provide guidance about an investment adviser’s obligations under the duties of loyalty and care. According to the proposed interpretation, those duties require the following:

      • Duty of loyalty

        • Duty to put the client’s interest ahead of own interests
        • Duty not to unfairly prefer one client over another
        • Duty of full and fair disclosure
      • Duty of care

        • Obligation to provide advice that is suitable and in the client’s best interest
        • Duty to seek best execution
        • Obligation to provide advice and monitoring over the course of the relationship
      • Firms should consider how the obligations in the proposed interpretation compare to their understanding of current requirements.
  • The SEC also sought comment on whether it should impose additional obligations on investment advisers to address perceived gaps in regulation from what is required of broker-dealers, including

    • federal licensing and continuing education requirements for investment adviser representatives;
    • provision of account statements; and
    • financial responsibility requirements.

What should firms do now?

  • The SEC’s decision to propose this package is a first step toward developing standards for advice to retail customers, regardless of whether they are investing through a retirement or taxable account.
  • The proposal is subject to change through the notice and comment process, which closes 90 days after the releases are published in the Federal Register, although given the complexity of the issues raised, the SEC might be expected to extend the comment period.
  • We encourage firms to review the release and consider submitting comments as they evaluate the impact on their business models.

What is Morgan Lewis doing in response?

  • We are reviewing the proposal and preparing a client alert with a more detailed assessment.
  • We will prepare client briefings and presentations on the proposal and its impact, and work with clients to submit comment letters.
  • We are coordinating with our interdisciplinary fiduciary practice to analyze the impact of the proposal on broker-dealers, investment advisers, and dual registrants, including across various business lines and product offerings.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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
Cadwalader, Wickersham & Taft LLP
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Cadwalader, Wickersham & Taft 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