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As noted in our most recent post, significant changes are coming to the investment advice industry. Not unsurprisingly, the Securities & Exchange Commission (SEC) voted last week to adopt a major advice reform package. The package includes Regulation Best Interest (Reg BI), as well as Form CRS. The SEC states the package
is designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.
The new advice reform package significantly updates decades-old investment advice standards, particularly for broker-dealers.
The package is ultimately four measures, the first of which contains Reg BI. Reg BI is intended to raise the standard of conduct for broker-dealers. The SEC will require broker-dealers “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.”
Broker-dealers will be required to establish and maintain written policies related to conflicts of interest. They must also disclose material facts about the broker-client relationship and any recommendations—including their capacity, fees, type and scope of services provided (or limits thereof), and whether they provide monitoring services. Reg BI also addresses account recommendations, specifically regarding distributions, rollovers, and transfers out of employer plans.
Reg BI isn’t a universal advice standard. Instead, what we will continue to have are two different conduct standards. Broker-dealers must adhere to Reg BI, while updated standards for investment advisors remain under consideration.
Also, the package does not define “best interest.” However, the package states definitively an investment advisor “owes a fiduciary duty to its clients under the Advisers Act—a duty that is established by and enforceable through the Advisers Act.”
Form CRS (“Client Relationship Summary”) makes up the other three measures of the package. It is intended to provide the following information to retail investors:
- the types of client and customer relationships and services offered by the firm;
- fees, costs, conflicts of interest, and the required standard of conduct associated with those relationships and services;
- whether the firm and its professionals have reportable legal or disciplinary history; and
- how to access additional information about the firm.
The advice reform requires advisors or broker-dealers to provide Form CRS to retail investors upon beginning a relationship, following a material change to the relationship summary, and upon certain events (updated).
The SEC approved all four measures in a 3-1 vote, with the rules set to become effective 60 days after publication in the Federal Register.
In addition, broker-dealers must comply with Reg BI by June 30, 2020. Therefore, they must closely examine sales practices, incentives, and material conflicts right away—alongside updating policies, procedures, and disclosure statements.
It will likely take several years past 2020 to know the full effect of this reform package. Consider meeting with your advisor or broker-dealer to discuss how your relationship may be affected.
For more information, please read the Commission’s June 5 press release.