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SEC Adopts Fiduciary Standards Package in 3-1 Vote

The SEC voted along party lines to adopt rules and interpretations that Chairman Jay Clayton says will “benefit retail investors and our markets for years to come.”  The SEC’s actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940. Commissioner Robert Jackson, the lone dissenter, asserted that the SEC’s final package does not go far enough. “Rather than requiring Wall Street to put investors first, today's rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice,” Jackson wrote. The final package is expected to draw lots of commentary as it is digested by the legal and financial services industries. The major sections of the package are summarized below according to the SEC’s news release:

  • Under Regulation Best Interest, broker-dealers will 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.  Regulation Best Interest will 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 Form CRS Relationship Summary will require registered investment advisers and broker-dealers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional.  Form CRS will also include a link to a dedicated page on the Commission’s investor education website, Investor.gov, which offers educational information about broker-dealers and investment advisers, and other materials.
  • The Commission also issued an interpretation to reaffirm and, in some cases, clarify its views of the fiduciary duty that investment advisers owe to their clients under the Advisers Act.  
  • The Commission issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion under the Advisers Act, which is intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser within the meaning of the Advisers Act. 

Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance. 

 
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