The SEC proposed a long-awaited package of rulemakings and interpretations on investment adviser and broker-dealer conduct, which according to Chairman Jay Clayton, reflects the SEC’s “efforts to fill the gaps between investor expectations and legal requirements, thereby increasing investor protection and the quality of advice, while preserving investor access and investor choice, recognizing that access and choice are driven by what is available and how much it costs.” The package proposes:
- Regulation Best Interest, under which a broker-dealer would be required 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.
- An interpretation to reaffirm and clarify the SEC’s views of the fiduciary duty that investment advisers owe to their clients.
- A new short-form disclosure document, Form CRS, which would provide retail investors with information about the nature of their relationship with their investment professional and would supplement other more detailed disclosures.
The SEC also proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors. Investment advisers and broker-dealers would also need to disclose their SEC registration status in certain retail investor communications.
The proposals received a 4-1 vote with Commissioner Kara Stein voting against and the other commissioners voicing their criticisms. Among Commissioner Stein’s key criticisms were that the best interest proposal does not define “best interest standard” and thus may lead retail investors to believe that broker-dealers are required by the rule to act in clients’ best interests. Stein suggested that the proposal fell short of requiring financial professionals to put their customers’ interests first, fully and fairly disclosing any conflicting interests, and providing retail customers with the best available options. “[T]he proposal merely requires broker-dealers to meet certain minimal obligations in order to get the protections of the safe harbor and thus be in compliance” with the best interest standard, Stein said. Initial reactions to the SEC’s proposals have been mixed with Reuters quoting consumer advocates who say the proposals do not go far enough. Bloomberg reports approval from some analysts, with some commenting that the proposals are friendly to the industry and seemingly provide broker-dealers with greater operational flexibility.There is a 90-day comment period for the proposals.