SEC Open Meeting
Apr. 18, 2018
The Commission proposed two rules and an
interpretation to address retail investor confusion about the relationships
that they have with investment professionals and the harm that may result from
that confusion. Evidence indicates that retail investors do not fully
understand the differences between investment advisers and broker-dealers,
which could lead them to choose the wrong kind of investment professional for
their particular needs, or to receive advice that is not in their best
interest. The Commission will therefore consider strengthening the
standard of conduct that broker-dealers owe to their customers, reaffirming
and, in some cases, clarifying the standard of conduct that investment advisers
owe to their clients, and providing additional transparency and clarity for
investors through enhanced disclosure designed to help them understand who they
are dealing with, and why that matters. The rulemaking package seeks to
enhance investor protections while preserving retail customer access to transaction-based
brokerage accounts and a broad range of investment products.
Regulation Best Interest
A broker-dealer making a recommendation to a
retail customer would have a duty to act in the best interest of the retail
customer at the time the recommendation is made, without putting the financial
or other interest of the broker-dealer ahead of the retail customer.
A broker-dealer would discharge this duty by
complying with each of three specific obligations:
Disclosure obligation: disclose to the retail
customer the key facts about the relationship, including material conflicts of
Care obligation: exercise reasonable diligence,
care, skill, and prudence, to (i) understand the product; (ii) have a
reasonable basis to believe that the product is in the retail customer’s best
interest; and (iii) have a reasonable basis to believe that a series of
transactions is in the retail customer’s best interest.
Conflict of interest obligation: 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 arising from financial incentives; other material
conflicts of interest must be at least disclosed.
Investment Adviser Interpretation
An investment adviser owes a fiduciary duty to its
clients — a duty that the Supreme Court found exists within the Advisers
Act. The proposed interpretation reaffirms, and in some cases clarifies,
certain aspects of the fiduciary duty that an investment adviser owes to its
Form CRS – Relationship Summary
Investment advisers and broker-dealers, and their
respective associated persons, would be required to provide retail investors a
relationship summary. This standardized, short-form (4 page maximum)
disclosure would highlight key differences in the principal types of services
offered, the legal standards of conduct that apply to each, the fees a customer
might pay, and certain conflicts of interest that may exist.
Investment advisers and broker-dealers, and the
financial professionals who work for them, would be required to be direct and
clear about their registration status in communications with investors and
prospective investors. Certain broker-dealers, and their associated
persons, would be restricted from using, as part of their name or title, the
terms “adviser” and “advisor” — which are so similar to “investment adviser”
that their use may mislead retail customers into believing their firm or
professional is a registered investment adviser.
The Commission has been considering issues
relating to changes in the market for investment advice, retail investor
understanding of their advice relationships, and broker-dealer conflicts of
interest, since the mid-1990s. The staff studied these matters further
pursuant to the Dodd-Frank Act’s mandate in Section 913. Most recently,
in June 2017, Chairman Jay Clayton sought public input on a variety of issues
associated with standards of conduct for investment professionals.
Today’s proposed rules and interpretations are the outcome of the Commission
and the staff’s extensive experience in and consideration of these issues.
The Commission will seek public comment on the
proposed rules and interpretations for 90 days. This extended comment
period will permit retail investors and other interested parties the
opportunity to review the extensive material, and potentially to gather relevant
data for submission in the comment file.