<--Back to Newsletter

Last year, we discussed the Securities and Exchange Commission's proposed Regulation Best Interest (BI). On June 5, 2019, the SEC voted to adopt a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors' relationships with investment advisers and broker-dealers, including the new Regulation BI, the new Form CRS Relationship Summary (Form CRS), and two separate interpretations under the Investment Advisers Act of 1940 (Advisers Act).

  1. Regulation BI

    Regulation BI was adopted with certain modifications to the proposed rule, including, without limitation, modifying the definition of "retail customer," defining in the rule text a "conflict of interest" for purposes of Regulation BI, establishing a new general "Compliance Obligation." Regulation BI enhances the existing standard of conduct applicable to broker-dealers and their associated persons at the time they recommend to a retail customer a securities transaction or investment strategy involving securities. This includes recommendations of account types and rollovers or transfers of assets and also covers implicit hold recommendations resulting from agreed-upon account monitoring. When making a recommendation, a broker-dealer must act in the retail customer's best interest and cannot place its own interests ahead of the customer's interests (General Obligation). General Obligation comprises the following four specified component obligations:

    • Disclosure Obligation. Before or at the time of the recommendation, a broker-dealer must disclose, in writing, all material facts about the scope and terms of its relationship with the customer.

    • Care Obligation. A broker-dealer must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer.

    • Conflict of Interest Obligation. A broker-dealer must establish, maintain, and enforce reasonably designed written policies and procedures addressing conflicts of interest associated with its recommendations to retail customers.

    • Compliance Obligation. A broker-dealer must also establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation BI as a whole.

  2. Form CRS

    The SEC adopted a new set of disclosure requirements designed to reduce retail investor confusion in the marketplace for brokerage and investment advisory services. The requirements are also designed to assist retail investors with the process of deciding whether to engage, or continue to engage, a particular firm or financial professional, and whether to establish, or to continue to maintain, an investment advisory or brokerage relationship. Firms will be required to deliver to retail investors Form CRS, which provides succinct information about the relationships and services the firm offers to retail investors, fees and costs that the retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history, among other things. Form CRS will also link to www.investor.gov/CRS on the SEC's investor education website, Investor.gov, which offers educational information to investors about investment advisers, broker-dealers, individual financial professionals, and other materials.

  3. Standard of Conduct Interpretation

    The SEC reaffirmed—and in some cases clarified—certain aspects of the fiduciary duty that an investment adviser owes to its clients under Section 206 of the Advisers Act. According to the SEC, the fiduciary duty must be viewed in the context of the agreed-upon scope of the relationship between the adviser and the client, and an adviser's federal fiduciary duty may not be waived, though it will apply in a manner that reflects the agreed-upon scope of the relationship. The SEC made further clarifications on duty of care, which includes, among other things: (i) the duty to provide advice that is in the best interest of the client, (ii) the duty to seek best execution of a client's transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and (iii) the duty to provide advice and monitoring over the course of the relationship.

  4. Broker-Dealer Exclusion Interpretation

    Section 202(a)(11)(C) of the Advisers Act excludes from the definition of "investment adviser" any broker or dealer that provides advisory services when such services are "solely incidental" to the conduct of the broker's or dealer's business and when such incidental advisory services are provided for no special compensation. The SEC confirmed and clarified its position with respect to the solely incidental prong and interpreted the statutory language to mean that a broker-dealer's provision of advice as to the value and characteristics of securities or as to the advisability of transacting in securities is consistent with the solely incidental prong if the advice is provided in connection with and is reasonably related to the broker-dealer's primary business of effecting securities transactions.

Regulation BI and Form CRS will be effective 60 days after publication in the Federal Register, and the interpretations will be effective upon publication in the Federal Register.

<--Back to Newsletter


Copyright © 2019 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

Related Areas

Share