Investment Advisor Compliance Requirements

Investment Advisor Compliance Requirements.  On June 5ththe SEC approved four agenda items that encompassed the “Reg BI Package.”  These four items are Regulation Best Interest-Standard of Conduct for Broker-Dealers; Form CRS Relationship Summary; Standard of Conduct for Investment Advisors; and Interpretation of “Solely Incidental.”  

This rule impacts federally registered investment advisors.  It is unsure at this point if the individual states will adopt Regulation BI or their own interpretation of the rule. 

Below is a summary of each item of the “Reg BI Package”:

Regulation Best Interest-Standard of Conduct for Broker-Dealers

Regulation Best Interest, substantially enhances the broker-dealer standard of conduct beyond existing suitability obligations, requiring broker-dealers, among other things, to act in the best interest of their retail customers when making a recommendation, including not placing their financial or other interests ahead of the interest of the retail customer. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone.

Broker-dealers will now have to meet four “obligations”: Disclosure Obligation; Care Obligation; Conflict of Interest Obligation and a Compliance Obligation.

Form CRS-Client Relationship Summary

The Form CRS relationship summary will require investment advisors and broker-dealers to deliver a relationship summary to retail investors at the beginning of their relationship.  Firms will summarize information about services, fees and costs, conflicts of interest, standard of conduct, and whether the firm and its financial professionals have any disciplinary history. 

The relationship summary will have a standardized question-and-answer format to promote comparison by retail investors in a way that is different from existing disclosures.  The relationship summary will permit the use of disclosure so that retail investors can easily access additional information from the firm about these topics.  It will also highlight the SEC’s investor education website (Investor.gov) which offers the investing public educational information, including a series of educational videos designed to provide ordinary retail investors with some basic information about broker-dealers and investment advisors.

The relationship summary is to be two pages in length for investment advisors’ firms (four pages in length for dually registered broker-dealers and investment advisors).  The relationship summary will be a part of the Form ADV and will be filed on the IARD system as Form ADV Part 3. 

The relationship summary is to be delivered to retail investors “at or before the time the advisor enters into an investment advisory agreement.”  This includes oral agreements, as well.  The relationship summary is to be updated within 30 days whenever any information in the relationship summary becomes materially inaccurate.  You must then communicate any changes in the updated relationship summary to retail investors who are existing clients within 60 days after the updates are required to be made and without charge.  

There are annual delivery requirements as well, around opening new accounts that are different; recommending a roll-over of assets from a retirement account into a new or existing account or investment; and, recommending an investment advisory service or investment that does not necessarily involve the opening of a new account.  

The definition of Retail Investor as provided by the SEC is:  “A natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” 

The compliance date for filing Form CRS is June 30, 2020.

Here is a link to the instructions for the Form CRS.  I encourage you to review these instructions to better understand what will be required within the Form CRS to meet your investment advisor compliance requirements.

SEC Investment Adviser Interpretations

Standard of Conduct for Investment Advisers

The Investment Advisor Interpretation (SEC IA Interpretation) reaffirms, interprets, clarifies, and provides guidance regarding the fiduciary duty derived from common law that an investment advisor owes to its clients under the Investment Advisers Act of 1940 (Advisers Act). The SEC IA Interpretation provides that this duty is principles-based and applies to the entire relationship between an investment advisor and the client. 

The SEC IA Interpretation also describes the underlying duties that constitute an investment adviser’s fiduciary duty: the Duty of Care and the Duty of Loyalty. It further breaks down the Duty of Careas follows: (i) a Duty to Provide Advice that is in the Best Interest of the Client; (ii) a Duty to Seek Best Execution; and (iii) a Duty to Provide Advice and Monitoring over the Course of the Relationship. The discussion of the “Duty to Provide Advice that is in the Best Interest of the Client” includes a subsection with a detailed discussion on the requirement for a “reasonable belief that advice is in the best interest of the client.”

Click here for the release.

Interpretation of “Solely Incidental”

The broker-dealer exclusion under the Advisers Act excludes from the definition of investment adviser, and thus from the Advisers Act, a broker or dealer whose performance of advisory services is solely incidental to the conduct of her or his business as a broker or dealer and who receives no special compensation for those services. The interpretation confirms and clarifies the Commission’s interpretation of the “solely incidental” prong of the broker-dealer exclusion of the Advisers Act. Specifically, the final interpretation states that a broker-dealer’s advice as to the value and characteristics of securities or as to the advisability of transacting in securities falls within the “solely incidental” prong of this exclusion if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.

Click here for the release.

My understanding is the SEC is considering FAQs on this new rule.  If so, I believe this will help provide the guidance for investment advisor compliance requirements with Regulation BI.

Leave a Reply

Your email address will not be published. Required fields are marked *

XHTML: You can use these tags <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>