FOR IMMEDIATE RELEASE
2018-68
Washington D.C., April 18, 2018 —
The Securities and Exchange Commission today voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors' relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.
Under proposed Regulation Best Interest, 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. Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.
In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission's views of the fiduciary duty that investment advisers owe to their clients. By highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers' legal obligations.
Next, the Commission proposed to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary. Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures. For advisers, additional information can be found in Form ADV. For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.
Finally, the Commission 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 registration status with the Commission in certain retail investor communications.
Taken as a whole, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest. The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer.
SEC Chairman Jay Clayton stated, "The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct. Importantly, I believe we can achieve these objectives while simultaneously preserving investors' access to a range of products and services at a reasonable cost. The package of rules and guidance that the Commission proposed today is a significant step to achieving these objectives on behalf of our Main Street investors."
The public comment period will remain open for 90 days following publication
of the documents in the Federal Register.
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FACT SHEET
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.
Proposal's Highlights
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:
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 clients.
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.
Background
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.
What's Next?
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.