SEC Proposes Broker-Dealer and Investment Adviser Standard of Conduct Rules and Interpretations to Enhance Retail Investor Protections and Transparency

by Dorsey & Whitney LLP

Dorsey & Whitney LLP

On April 18, 2018, the SEC proposed a package of rulemakings and interpretations aimed at increasing transparency in the relationships of clients with their broker-dealers and investment adviser and address investor confusion regarding the duties and obligations across different types of investment professionals.1  A summary of the new SEC proposals can be found below.

Exchange Act Regulation Best Interest

As proposed, Regulation Best Interest would require broker-dealers to act in the best interest of their retail customers when making recommendations as to securities transactions or an investment strategy and would prohibit broker-dealers from putting their own financial interests ahead of those of retail customers when making such recommendations.2  Broker-dealers would be able to discharge this duty to retail customers in the following three ways:

  1. Disclosure – Broker-dealers (or natural persons who are associated persons of broker-dealer) would be obligated to disclose in writing to retail customers the material facts relating to the broker-dealer and client relationship, including a disclosure of fees and material conflicts of interest prior to or at the time of any such recommendation.
  2. Care – Broker-dealers (or natural persons who are associated persons of broker-dealer) would be obligated when making a recommendation to a retail customer to exercise reasonable diligence, care, skill and prudence to (a) understand the risks and rewards of the investment product being recommended and that the recommendation was in the best interests of at least some retail customers, (b) have a reasonable basis to believe that the product is in the best interest of a particular retail customer based upon that retail customer’s investment profile, and (c) have a reasonable basis to believe that a series of transactions, even if the recommendation is in the retail customer’s best interest when viewed in isolation, is not excessive and would be in the best interest of the retail customer when considering the retail customer’s investment profile.
  3. Conflicts of Interest – Broker-dealers (or natural persons who are associated persons of broker-dealer) would be obligated to adopt and implement policies and procedures that would identify, disclose and mitigate, or eliminate material conflicts of interest that arise as a result of a broker-dealer’s financial incentives associated with a broker-dealer’s recommendation to retail customers. 

The SEC believes that proposed Regulation Best Interest would improve investor protection by enhancing the professional standards of conduct that currently apply to broker-dealers when they make recommendations to retail customers. Furthermore, the SEC believes that the best interest obligation will reduce the potential harm to retail customers from recommendations provided in circumstances where conflicts of interest, including those arising from financial incentives, exist while preserving investor access to advice and choice with regard to advice relationships and compensation methods, and is workable for the transaction-based relationship offered by broker-dealers.

Proposed Regulation Best Interest would only apply to retail customers, as defined in the proposed rule.  A retail customer would be a person (or their legal representative) who receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer and uses the recommendation primarily for personal, family, or household purposes. 

Notably, the SEC stated in the proposing release that proposed Regulation Best Interest would not create a new private right of action nor would it create a new right of recession.

As proposed, Regulation Best Interest purportedly proposes a standard of conduct for broker-dealers however, it does not define what “best interest” means in the text of the proposed rule.  Further, it remains to be seen how meaningful overlap of Regulation Best Interest with the existing FINRA requirement of fair dealing and the suitability standard currently applicable to broker-dealers and the fiduciary standard applicable to investment advisers will be addressed or resolved. 

Investment Adviser Fiduciary Duty Interpretation

In light of the SEC’s proposal of Regulation Best Interest, the SEC issued an interpretation to reaffirm and in some cases clarify the fiduciary duty that an investment adviser owes to its clients under the anti-fraud provisions of Section 206 of the Investment Advisers Act of 1940, as amended. The interpretation provides a full discussion on the implied duty of care (i.e., to provide advice that is in the client’s best interest, to seek best execution and to provide advice and monitoring over the course of the relationship) and the duty of loyalty (to put client’s interest first, not to favor one client over another, to make full and fair disclosure and avoid conflicts of interest).  In addition, the interpretation requests comment on whether there are any significant issues the interpretation has not address and whether the fiduciary duty should be codified under Investment Advisers Act Section 206. The interpretation also includes a request for comment regarding areas of enhanced investment adviser regulation, including, federal licensing and continuing education to address minimum and ongoing competency requirements for personnel, provision of accounts statements specifying the dollar amounts of fees and expenses and financial responsibility, such as net capital and fidelity bonding requirements.

Client Relationship Summary—New Form CRS and Form ADV Part 3

In furtherance of achieving greater transparency and informing retail investors about the relationships and services their investment professionals offer, the SEC would require that broker-dealers and investment advisers to provide a short form “client relationship summary” document to retail investors.4  Limited to four pages in length, the client relationship summary would provide disclosures to retail investors outlining eight separate items covering:

  1. an introduction briefly explaining the types of accounts and services the firm offers generally;
  2. the relationships and services the firm provides to retail investors;
  3. the legal standard of conduct applicable to those to those services
  4. the fees and costs payable by retail investors for such services, 
  5. comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers)
  6. conflicts of interests, and 
  7. direction as to where to find additional information, including about the firm’s or its investment professional’s disciplinary history and who to contact about complaints (in fact, the summary must include instructions on reporting problems to the SEC via its investor assistance hotline); and
  8. key questions for retail investors to ask the firm’s professionals.

Firms would be required to provide the client relationship summary to their retail investors at the beginning of their relationship with the firm and then again following a material change.  For broker-dealers, the client relationship summary would be filed with the SEC on new cForm CRS via EDGAR .  For investment advisers, the client relationship summary would be filed with the SEC on new Part 3 of Form ADV via IARD.  The client relationship summary for both broker-dealers and investment advisers would be available on the SEC’s public disclosure website.  To provide adequate transition time, the relationship summary would not be required to be filed or delivered by broker-dealers or investment advisers until the date six months after the effective date (for investment advisers, as part of the firm’s next annual updating amendment to Form ADV that is required six months after the effective date).

As a visual aid, the SEC has released three mockups of the client relationship summary to give of what the disclosure document may look like: one for investment advisers, one for broker-dealers, and one for dual-registrants.

In addition, this SEC proposal would limit the ability of broker-dealers to identify themselves as “advisors” or “advisers” in communications with retail customers unless the broker-dealer was dually registered with the SEC as an investment adviser.  This restriction is an attempt by the SEC to prevent investor confusion about the different roles of broker-dealers and investment advisers and the financial services that are offered by each – confusion that the SEC believes likely arises from the use of misleading titles by market professionals.  Broker-dealers and investment advisers—as well as their associated natural persons and supervised persons, respectively--would also be required to disclose in retail investor communications clearly and directly their SEC registration status and, in the case of associated natural persons and supervised persons, their relationship to the firm, to both current and prospective clients.

These proposals are an effort by the SEC to strengthen and clarify the standard of conduct that broker-dealers and investment adviser owe to their retail customers and provide customers with clear and meaningful disclosure regarding their investment professionals.  The proposals include copious requests for comments—reminiscent of the Dodd-Frank rulemaking process.  The SEC will be seeking public comments on these proposals over a 90 day period. 


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.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.