The Securities and Exchange Commission has been working on a way for consumers to better understand the difference between securities brokers and investment advisers. The Department of Labor made an attempt with respect to retirement plans, but that is a mess.
I’m not sure how much of a mess the new Regulation Best Interest is going be for private fund managers. The devil is in the details and the details are in the 524 page release for the new FORM CRS Relationship Summary and Amendments to Form ADV and the 771 pages of the Regulation Best Interest: The Broker-Dealer Standard of Conduct.
According to the press release, 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, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products. Specifically, these actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940. “
The bigger burden is likely to be on broker-dealers. But changes are required for investment advisers and private fund managers.
One piece of good news is that Regulation BI attempts to clarify the fiduciary standard for investment advisers. That standard is not in the text of the Investment Advisers Act. It’s been developed through court cases.
The SEC published a new Commission Interpretation Regarding Standard of Conduct for Investment Advisers codifies an Investment Advisers’ Fiduciary Duty:
- Duty of Loyalty
- Duty of Care
- Duty to Provide Advice that is in the best interest of the client
- Duty to Seek Best Execution
- Duty to Provide Advice and Monitoring over the course of the relationship
Get set for Form ADV Part 3. This new filing is directed at registered investment advisers that offer services to retail investors. Part 3 is the new relationship summary. New Rule 204-5 will require an investment adviser to deliver an electronic or paper version of the relationship summary to each retail investor before or at the time the adviser enters into an investment advisory contract with the retail investor. You’ll also need to post it to your website.
The deadline for compliance is June 30, 2020. We’ve got a year.
Where to turn to first? I’m diving into the Commission Interpretation Regarding Standard of Conduct for Investment Advisers.
Sources:
- Form CRS Relationship Summary; Amendments to Form ADV
- Regulation Best Interest: The Broker-Dealer Standard of Conduct
- Commission Interpretation Regarding Standard of Conduct for Investment Advisers
- Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser
- Statement Regarding the SEC’s Rulemaking Package for Investment Advisers and Broker-Dealers – Rick Fleming, Investor Advocate
- Statement on Final Rules Governing Investment Advice– Commissioner Robert J. Jackson Jr.
- Statement at the Open Meeting on Commission Actions to Enhance and Clarify the Obligations Financial Professionals Owe to our Main Street Investors -Chairman Jay Clayton
- Statement at the Open Meeting on Regulation Best Interest, the Interpretation of the Standard of Conduct for Investment Advisers, the Form CRS Relationship Summary, and the Interpretation of “Solely Incidental”– Commissioner Elad L. Roisman
- SEC’s Broker Rule to Require Bias Disclosures; Effect on Pay Practices Unclear by Dave Michaels in The Wall Street Journal