The Securities and Exchange Commission (SEC) adopted Regulation Best Interest and other rules designed to enhance the quality and transparency of investors’ relationships with their advisers and broker-dealers.
Under Regulation Best Interest, broker-dealers will 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. SEC officials said it would improve upon the suitability obligations – meaning the recommendations must be suitable for the investor. The SEC said this new rule makes clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer. This would replace the Department of Labor’s fiduciary rule, which said investment advisors must serve as fiduciaries for clients. The fiduciary rule was vacated last year.
The SEC also put forth the Form CRS Relationship Summary, which will require registered investment advisers and broker-dealers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional. The format of the summary allows for comparability among the two different types of firms in a way that is distinct from other required disclosures. The form will also include a link to a page on the SEC’s investor education website, Investor.gov, which offers educational information about broker-dealers and investment advisers.
“The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades,” SEC Chairman Jay Clayton said. “Our staff, working collaboratively across all of our Divisions and many of our Offices, has leveraged its decades of experience and expertise in considering these issues. I believe that the exceptional work of the SEC staff, including their careful evaluation of the feedback we received, will benefit retail investors and our markets for years to come. This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”
The SEC also issued an interpretation to clarify its views of the fiduciary duty that investment advisers owe to their clients under the Advisers Act. By highlighting principles relevant to the fiduciary duty, advisers and their clients will have greater clarity about advisers’ legal obligations. Finally, the SEC issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion under the Advisers Act, which will more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser.
Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register. There will be a transition period until June 30, 2020, to give firms sufficient time to come into compliance as the rules will require market participants to make changes to their operations.
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