News & Insights

Sec Adopts Rules And Interpretations Regarding Broker Dealer And Investment Adviser Standards Of Conduct

On June 5, 2019, the SEC voted to adopt a package of rulemakings and interpretations regarding broker dealers’ and investment advisers’ standards of conduct, including new Regulation Best Interest, new Form CRS Relationship Summary, and two interpretations under the Investment Advisers Act of 1940.

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.   This Regulation will augment the broker dealer standard of conduct beyond existing suitability obligations and prohibit a broker dealer from putting its financial interests ahead of the interests of a retail customer when making recommendations.

The Form CRS Relationship Summary will require registered investment advisers and broker dealers to deliver a relationship summary to retail investors at the beginning of their relationship.  Firms will summarize information covering services, fees and costs, conflicts of interest, legal standard of conduct, and whether or not the firm and its financial professionals have a disciplinary history.

The interpretations of the Advisers Act reaffirm and clarify certain aspects of the investment adviser fiduciary duty as well as the “solely incidental” exclusion to the Act covering broker dealer advice regarding the value and characteristics of securities or as to the advisability of transacting in securities if the advice is provided in connection with and is reasonably related to the broker dealer’s primary business of effecting securities transactions.

The interpretations of the Adviser Act will be effective upon publication in the Federal Register.  Regulation Best Interest and Form CRS will become effective 60 days from publication in the Federal Register.  However, a transition period will be included until June 30, 2020, to provide registered broker dealers time to comply with Regulation Best Interest and registered broker dealers and investment advisers registered with the Commission time to plan for preparing, delivering, and filing summaries.  We urge our broker dealer and investment adviser clients to prepare for these enhancements and clarifications to the standards of conduct by assessing their operations to determine required changes, including to mandatory disclosures, marketing materials, and compliance systems.