SEC adopts Regulation Best Interest, Form CRS summary, and related interpretations - 05 June 2019

The SEC voted in favor of adopting a controversial proposal to enact Regulation Best Interest (BI) to require advisors and brokers to disclose certain information to retail investors. Regulation BI has three main components: the disclosure obligation, the care obligation, the conflict-of-interest obligation, and the compliance obligation. The disclosure obligation says broker-dealers must disclose material facts about the relationship and recommendations of the products and services they provide. The care obligation requires that a broker-dealer must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer. The broker-dealer must understand potential risks, rewards, and costs associated with the recommendation. The conflict-of-interest obligation details that a broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and—at a minimum—disclose or eliminate conflicts of interest. Finally, the compliance obligation says broker-dealers must establish, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Regulation BI as a whole. The purpose of this regulation is to enhance retail investors’ relationships with their advisors and brokers and to create more consistency in disclosure while preserving access to a wide selection of services and products.

The SEC also voted to enact Form CRS saying that investment advisors and broker dealers are required to deliver relationship summaries to their customers to provide retail investors with a better understanding of their options. Form CRS requires broker-dealers and investment advisors to provide, using simple language, information about the nature of a retail customer’s relationship with their financial professional, specifically about principal types of services offered, fees clients might pay, and certain conflicts of interest that may exist. For CRS is designed to be a supplement to more detailed disclosures investment advisers provide in the Form ADV.  Regulation BI and Form CRS will come into effect June 30, 2020.

Finally, the SEC adopted two interpretations: the fiduciary duty interpretation and the solely incidental interpretation. The first says highlighting principals of fiduciary duty will provide for a greater clarity about investment advisors’ legal obligations, while the latter says the language in the Investment Advisors Act of 1940 exempts brokers from registering as investment advisors if their advice is “solely incidental” and they don’t receive special compensation for it. 

For more information visit http://business.cch.com/srd/2019-89.pdf .