SEC Fiduciary Rule Proposal – The Finer Points

Author: NICSA

On April 18, 2018, the Securities and Exchange Commission (SEC) voted 4-1 to propose a package of rules and interpretations intended to enhance the retail investor experience and provide greater transparency regarding investors’ relationships with advisers and broker-dealers.

NICSA members took a close look at the proposal during a recent #WebinarWednesday discussion moderated by Tim Welsh, Senior Manager – Financial Services Risk Management at Ernst & Young LLP and featuring panelists from Dechert LLPand Pershing(a BNY Mellon company).

“Commissioner Jay Clayton has a strongly indicated that these proposals are intended to supplant the DOL fiduciary role and also similar state initiatives,” said Susan Grafton, Partner at Dechert LLP, adding that comments are due Aug. 7.

Grafton said the SEC’s proposals include Regulation Best Interest (Reg BI), a new standard of conduct for broker-dealers; interpretative guidance on the standard of conduct for advisers; solicitation of comment on substantive requirements for SEC-registered advisers and their personnel; new disclosure requirements; and labeling rules.

Welsh discussed similarities as well as critical differences between the now-overturned DOL rule and the new SEC proposal.

“The DOL rule just governed ERISA accounts, so the focus there was on broker-dealers who provided investment advice on retirement plans and other associated investment vehicles, whereas this is more comprehensive and goes beyond just retirement accounts,” Welsh said. “Where the SEC is focusing the guidance of Regulation Best Interest is that it would be for broker-dealers who provide advice to retail customers. Which accounts are ‘retail customers’ will be the key deciding factor of when you have to incorporate the SEC’s guidance.”

The DOL rule also presented more stringent requirements surrounding conflicts of interest than Reg BI. “Under the SEC’s proposal, effectively disclosing your conflicts of interest can remedy that conflict, but the key distinction for firms to make is whether or not that disclosure of the conflict of interest is adequate in order to fall within the SEC’s informed consent provision,” he said.

Tonia Bottoms, Managing Director & Senior Managing Counsel at Pershing, a BNY Mellon company, provided an overview of the new Form CRS, also known as Customer or Client Relationships Summary. “The form would be used to inform retail investors about relationships and services offered by the firm and the standard of conduct and fees associated with those services, and to specify conflicts of interest and whether the firm or its financial professionals have reportable legal or disciplinary events — all of which the retail investors should be aware of when engaging the firm’s services,” she said.

The form also introduces restrictions on the use of titles.

“In order to deter potentially misleading practices, the SEC has proposed to restrict the use of terms and require firms to disclose their regulatory status in their investor communications,” Bottoms said. “The proposed rule would restrict any broker-dealer, or any natural person who is associated with the broker-dealer, from using as part of its name or title, the words “adviser” or “advisors” when communicating with a retail investor, unless the broker-dealer is registered as an investment adviser — and they can be registered under the Advisers Act or with a state — or a natural person who is an associated person of a broker-dealer and that person is supervised by an investment advisor registered under the Advisers Act or a state.”

With the Aug. 7 deadline for comments quickly approaching, Bottoms urged listeners to avoid “fiduciary fatigue” caused by the DOL fiduciary rule.

“While we may be in a much better place with the proposal coming from the SEC, I still think that as an industry we want to look at it with a critical eye, be sure to offer commentary, and be available for the regulator to answer additional questions,” she said.



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