Tag: Release No. 34-83063

The New Standards for Investment Advisers and Broker-Dealers

One of the challenges that consumers face when dealing with a financial adviser is what it means to be a “financial adviser.” The terms financial planner, wealth consultant, stockbroker, investment adviser, financial consultant, and others get thrown around, leaving you how that person gets paid for helping you with your money.

The Securities and Exchange Commission is trying to help consumers with a trio of proposals.

On the Broker-Dealer side, the SEC is proposing Regulation Best Interest. This would create a new standard of conduct for broker-dealers and their representatives when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. The proposed standard of conduct is to

  • act in the best interest of the retail customer
  • at the time a recommendation is made
  • without placing the financial or other interest of the broker-dealer or natural person who is an associated person making the recommendation ahead of the interest of the retail customer

This new standard would be satisfied if:

  1. broker-dealer, before or at the time of the recommendation reasonably discloses to the retail customer, in writing, the material facts relating to the scope and terms of the relationship, and all material conflicts of interest associated with the recommendation;
  2. broker-dealer, in making the recommendation, exercises reasonable diligence, care, skill, and prudence; the broker-dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations;
    and
  3. broker-dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with such recommendations.

For item 1, there would be a new Form CRS. Broker-dealers would provide this to their clients.

For registered investment advisers, there would be a new Part 3 to Form ADV that would be Form CRS.

There is a lot in this package. SEC Chairman Clayton summarized them:

We propose to fill these gaps through (1) mandating clear disclosures — specifically, addressing how BDs and IAs identify themselves to investors and requiring them to provide investors with a standardized disclosure document of no more than four pages in length, highlighting among other things the principal services offered, legal standards of conduct that apply, fees the customer will pay, and certain conflicts of interest that exist, (2) raising the standard of conduct applicable to BDs to make it clear, among other things, that they cannot put their interests ahead of the interests of their retail customers, and (3) reaffirming, and in some cases clarifying, our views on the standard of conduct applicable to investment advisers.

There will be lots of commentary on these proposed regulations from all sides. One of those critics is SEC Commissioner Kara M. Stein:

 I am concerned that this rule will not only confuse retail investors, but also broker-dealers. In particular, the lack of a definition of best interest, the use of similar terms to mean different things, the use of different terms to mean the same things, and the possibility that the SEC and FINRA interpret the same language in their suitability standards differently. All of these concerns would make it difficult for the industry to discern a clear compliance path. Any resulting confusion may well result in higher compliance costs for broker-dealers, which will likely be passed onto the investor. What’s more, the lack of a clear standard is not likely to give investors more confidence in the broker-dealer business model.

There is over 1000 pages in these proposals. I’ll share more thoughts on them this week.

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