The SEC adopted today a number of rulemakings and interpretations focused on bringing greater quality and transparency to the relationships between retail investors and investment advisors and broker-dealers. Of special interest to investment advisors is a new Form CRS Relationship Summary and an interpretation under the Investment Advisers Act of 1940 (the “Advisers Act”) regarding the fiduciary duty of investment advisors.
Form CRS Relationship Summary
The Form CRS Relationship Summary will require SEC-registered investment advisors and broker-dealers to deliver a relationship summary to retail investors at the beginning of their relationship. Firms will summarize information about services, fees and costs, conflicts of interest, legal standard of conduct, and whether or not the firm and its financial professionals have disciplinary history. The relationship summary will have a standardized question-and-answer format to promote comparison by retail investors in a way that is distinct from existing disclosures. The relationship summary will also highlight the SEC’s investor education website, Investor.gov. Form CRS will become effective 60 days after it is first published in the Federal Register and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance.
Investment Advisor Interpretation
The SEC also issued today an interpretation to reaffirm and, in some cases, clarify the SEC’s views of the fiduciary duty that investment advisors owe to their clients under the Advisers Act. In its release, the SEC stated that this fiduciary duty is principles-based and applies to the entire relationship between an investment adviser and its client. The Interpretation will be published on the SEC’s website and in the Federal Register.
Rules and Interpretations Concerning Broker-Dealers
The SEC’s package of rulemakings and interpretations also included Regulation Best Interest and an interpretation regarding the broker-dealer exclusion under the Advisers Act.
Regulation Best Interest will require broker-dealers to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. The Regulation will also enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.
The SEC also issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion under the Advisers Act, intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment advisor within the meaning of the Advisers Act. Specifically, the final interpretation states that a broker-dealer’s advice as to the value and characteristics of securities or as to the advisability of transacting in securities falls within the “solely incidental” prong of this exclusion if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.
Next Steps
Again, the rules, forms, and interpretations noted above will be published on the SEC’s website and in the Federal Register. The rules and forms will be effective 60 days from publication in the Federal Register and the interpretations will be effective upon publication in the Federal Register. By June 30, 2020, broker-dealers and investment advisors registered with the Commission will be required to prepare, deliver to retail investors, and file a relationship summary and registered broker-dealers must begin complying with Regulation Best Interest.
For more information about the rulemakings and interpretations discussed above, please contact NCA Compliance.
Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm providing a wide range of customized compliance solutions for investment advisors. Ms. Nelson previously worked for the Securities and Exchange Commission and a large investment manager in New York.
