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SEC Submits “Fiduciary Rules” for Public Comment

The Securities and Exchange Commission voted 4-1 yesterday to seek public comment on its proposed best interest rule for brokers, a new broker-client relationship disclosure form, and whether to restrict the use of the adviser/advisor title.

The Securities and Exchange Commission voted 4-1 yesterday to seek public comment on its proposed best interest rule for brokers, a new broker-client relationship disclosure form, and whether to restrict the use of the adviser/advisor title.

“The tireless work of the SEC staff has proven to me that we can increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct,” said SEC Chairman Jay Clayton. “Importantly, I believe we can achieve these objectives while simultaneously preserving investors’ access to a range of products and services at a reasonable cost.”

Under the SEC’s proposal, a broker-dealer would 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 to a retail customer, without putting the financial or other interest of the broker-dealer ahead of the customer.

The broker-dealer could discharge this duty by complying with three specific obligations, including disclosing key facts about the relationship, including material conflicts of interest; understanding the product and having a reasonable basis to believe it’s in the retail customer’s best interest; identifying material conflicts of interest arising from financial incentives, and at minimum, disclosing and mitigating the conflicts, while also disclosing other conflicts.

Next, the SEC proposed to address investor confusion about the nature of their relationships with investment professionals through a standardized, short-form (4-page maximum) disclosure document — a customer or client relationship summary.

Form CRS would provide retail investors with information about the nature of their relationship with their investment professional and would supplement other more detailed disclosures. The document would highlight key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.

The SEC also proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors. Investment advisers and broker-dealers would also need to disclose their registration status with the SEC in certain retail investor communications.

Finally, the SEC also proposed an interpretation to reaffirm and clarify its views of the fiduciary duty that investment advisers owe to their clients.

If the SEC’s 1,000-page rulemaking package is enacted, it could replace the Department of Labor’s fiduciary rule, which is currently under review as directed by President Trump and was vacated by the Fifth Circuit Court of Appeals last month.

Democratic commissioner Kara Stein, the lone dissenter, said that the SEC’s ‘Regulation Best Interest’ proposal does not go far enough and would be more aptly named ‘Regulation Status Quo.”

Stein said, “Does this proposal require financial professionals to put their customers’ interests first and fully and fairly disclose any conflicting interests? No. Does this proposal require all financial professionals who make investment recommendations related to retail customers to do so as fiduciaries? No. Does this proposal require financial professionals to provide retail customers with the best available options? No.”

The public comment period will remain open for 90 days following publication of the documents in the Federal Register.

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