On June 5, 2019, the Securities and Exchange Commission adopted a long-awaited suite of rules, interpretive guidance and forms that, in the words of the accompanying press release, is “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.” The package consists of four elements, three of which had been proposed previously:
• Regulation Best Interest (Regulation BI), requiring a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer (Release No. 34-86031);
• Interpretive guidance regarding the standard of conduct for investment advisors (Release No. IA-5248);
• Rules for brokers and investment advisors creating a requirement to provide a new short-form relationship summary, in new Form CRS, for brokers, and in an amended Form ADV, for investment advisors (Release No. 34-86032 and IA-5247); and
• Interpretive guidance regarding the solely incidental prong of the broker-dealer exclusion from the definition of investment advisor (Release No. IA-5249). This guidance was not proposed previously but is, according to the release, consistent with prior SEC guidance and relevant case law.
Key Takeaways
Brokers. Beginning on June 30, 2020, brokers will be required to comply with the requirements of Regulation BI when making recommendations to retail customers. Although the components of the broker’s duty to retail customers is similar to and to some extent based on the Financial Industry Regulatory Authority’s suitability rule, FINRA Rule 2111, Regulation BI provides a greater level of detail around avoiding or remediating conflicts of interest, as well as other elements of the duty. FINRA has indicated that it is considering amending Rule 2111 or removing those parts of it that are inconsistent with or covered by Regulation BI. Existing brokers must file Form CRS through Web CRD by June 30, 2020, and deliver a copy to retail investors no later than July 30, 2020.
The SEC has added guidance for brokers that also provide investment advice, with respect to the “solely incidental” exception to registration as an investment advisor.
Investment Advisors. As discussed below, the SEC has provided interpretive guidance, in one place, concerning the investment advisor’s duty of care and duty of loyalty to its clients. The SEC has also added a requirement that investment advisors file a Form CRS relationship summary with the SEC, through the Investment Adviser Registration Depository, or IARD, and deliver copies of the relationship summary to clients who are retail investors, as defined in the instructions to the form. Existing investment advisors must file Form CRS by June 30, 2020, and deliver a copy to retail investors no later than July 30, 2020.
Regulation Best Interest
Regulation BI sets out the duty to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Important elements of Regulation BI are the definitions and the components of the broker’s duty.