The Securities and Exchange Commission (the “SEC”) proposed (i) an interpretation of an investment adviser’s fiduciary duty to its clients and enhanced standards for investment advisers and (ii) a new short-form disclosure statement called Form CRS for investment advisers and broker-dealers to deliver to their retail investors. The following is a brief overview of these proposals.
Investment Adviser’s Fidcuiary Duty and Enhanced Standards1
The SEC’s proposed interpretation reaffirms and clarifies certain aspects of the fiduciary duty that an investment adviser owes to its clients. The proposed interpretation provides that investment advisers’ fiduciary duties include: (i) the duty of care, which includes the duty to provide advice that is in the client’s best interest, the duty to seek best execution and the duty to act and provide advice and monitoring over the course of the relationship and (ii) the duty of loyalty, which requires investment advisers to put their clients’ interests before their own, make full and fair disclosure of all material facts with respect to the advisory relationship and not favor one client over another in an unfair manner.
The proposed interpretation also requests comment regarding areas of enhanced investment adviser regulation, including: (i) federal licensing and continuing education requirements for registered investment adviser personnel; (ii) the provision of account statements to registered investment adviser clients; and (iii) financial responsibility requirements for registered investment advisers that align with those of broker-dealers.
Form CRS Relationship Summary2
The SEC has proposed new and amended rules and forms which would require investment advisers and broker-dealers to deliver a standard short-form relationship summary to retail investors on new Form CRS. New Form CRS would contain sections covering: (i) an introduction; (ii) the relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that a retail investor will pay; (v) conflicts of interest; (vi) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (vii) key questions for retail investors to ask the firm’s investment professional. “Retail investor” would be defined as “a prospective or existing client or customer who is a natural person (an individual).”
Lastly, the proposal would restrict brokers or dealers and their associated persons, when communicating with retail investors, from using as part of their name or title the terms “adviser” and “advisor” unless such broker or dealer is registered as an investment adviser with the SEC or a state, or such associated person is a supervised person of an investment adviser registered with the SEC or a state.
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1 https://www.sec.gov/rules/proposed/2018/ia-4889.pdf.
2 https://www.sec.gov/rules/proposed/2018/34-83063.pdf.
