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New SEC Rulemaking Package Seeks to Enhance Retail Investor Protection and Awareness

By Erik M. Ideta, Esq. of Shustak Reynolds & Partners, P.C. posted on Wednesday, May 2, 2018.

Erik M. Ideta

Erik M. Ideta


Erik M. Ideta, Esq.
619.696.9500 ext. 125
[email protected]

On April 18, 2018, the SEC voted 4 to 1 to propose the Standards of Conduct for Investment Professionals Rulemaking Package, a package designed to enhance the protection and decision-making of retail, or “Main Street,” investors. 

The package has three components.  The first is a proposed Regulation Best Interest, requiring broker-dealers to act in the best interests of retail investors when recommending a securities transaction or investment strategy.  The second is interpretative guidance reaffirming and clarifying the fiduciary duties investment advisers owe their clients.  The third is a proposed short-form disclosure that would provide easy-to-understand information regarding the nature of an investor’s relationship with the investment professional.

Regulation Best Interest

The first component, the proposed Regulation Best Interest, will require broker-dealers to: (1) disclose material facts regarding the scope and terms of the relationship, including material conflicts of interest in recommending a particular securities transaction or investment strategy; (2) exercise reasonable care to understand the risks and rewards associated with an investment and have a reasonable basis for believing it is in the retail investor’s best interest; and (3) implement written policies to disclose and mitigate, or eliminate, conflicts of interest associated with a recommendation.

Interpretive Guidance

The second component of the rulemaking package, the proposed interpretive guidance, will reaffirm and clarify the SEC’s views regarding the fiduciary duties investment advisers owe their clients under Section 206 of the Investment Advisers Act of 1940, namely, the common law duties of loyalty and care.  The duty of care requires advisers to provide advice that is in their clients’ best interest, to seek “best execution” for their clients (i.e., maximize overall value for their clients in a given transaction), and to adequately monitor their clients’ accounts during the term of the relationship.  The duty of loyalty, in turn, requires advisers to put their clients’ interests above their own, to refrain from showing favoritism to clients who pay higher fees, and to disclose and avoid conflicts of interest.

In connection with this, the SEC requested public comment on three issues: (1) whether advisers should be subject to federal continuing education and licensing requirements; (2) whether advisers should be required to provide periodic account statements disclosing personalized fees and expenses; and (3) whether advisers should be subject to financial responsibility obligations similar to those placed on broker-dealers.

Form CRS Relationship Summary

The third component of the SEC’s rulemaking package, the proposed Form CRS Relationship Summary, would require financial professionals to provide retail investors with a standardized four-page disclosure highlighting the key differences in services offered by broker-dealers and investment advisers, the legal standards of conduct applicable to each, the fees an investor would pay for each, and any conflicts of interest that may exist.  To prevent confusion with the term “investment adviser,” the rule also would require broker-dealers and their financial professionals to refrain from using the terms “adviser” and “advisor” in their names or titles. 

According to SEC Chairman Jay Clayton, the SEC was prompted to propose this rulemaking package due to longstanding investor confusion over the key differences between broker-dealers and investment advisers.  This confusion, according to the Chairman, could harm investors by causing them to select services that are not best suited to their needs, or by making them more susceptible to harm from a conflict of interest that is not fully understood or appreciated.  The Chairman opined that clarifying applicable standards of conduct and reducing investor confusion through disclosure could mitigate the risk of harm to retail investors.

Once the package of rules and guidance is published in the Federal Register, the public will have 90 days to comment on them.

Shustak Reynolds & Partners, P.C. regularly represents firms and individuals in SEC, FINRA, securities, investment, and financial services matters, including litigation, arbitration, enforcement and investigation matters. If you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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