SEC approves investment advice standard of conduct rules

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Eversheds Sutherland (US) LLPToday, in a 3-1 vote, the US Securities and Exchange Commission (SEC) adopted a comprehensive package of rulemakings and interpretations governing the standard of conduct applicable to broker-dealers providing retail investment advice and the fiduciary duty applicable to SEC-registered investment advisers. The package includes the following specific components:

  • a new rule establishing a standard of conduct (captioned as “Regulation Best Interest”) for broker-dealers and natural persons who are associated persons of a broker-dealer when making recommendations to retail customers of any securities transaction or investment strategy involving securities or regarding the opening of an account;
  • the Form CRS Relationship Summary, requiring registered broker-dealers and investment advisers to provide a brief relationship summary to retail investors;
  • an interpretation of the fiduciary duty applicable to SEC-registered investment advisers; and
  • an interpretation of the “solely incidental” prong of Section 202(a)(11)(C) of the Investment Advisers Act of 1940 (which provides an exclusion from the definition of investment adviser for broker-dealers who provide investment advice on a solely incidental basis to their brokerage activities and do not receive any special compensation for it).

Commissioners Clayton, Peirce and Roisman voted to adopt the package of rulemakings and interpretations, while Commissioner Jackson did not. The SEC has released the adopted versions of Regulation Best Interest, Form CRS, the Investment Adviser Fiduciary Duty Interpretation, and the Solely Incidental Interpretation. A compliance date of June 30, 2020 is set for Regulation Best Interest and Form CRS. The SEC’s two interpretations under the Investment Advisers Act of 1940 will become effective upon publication in the Federal Register.

In the meantime, you can review our Counting down to June 5 thought piece discussing the open questions about the package of rulemakings and interpretations that we anticipated the SEC would address.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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