SEC Guidance on Broker-Dealer and Investment Adviser Fiduciary Standards – An Industry Tailored Solution

The DOL’s fiduciary rule, originally scheduled to be phased in starting April 10, 2017 to the beginning of this year, will most likely be replaced by a rule from the SEC due to recent court findings. The DOL decided not to file for a rehearing in the U.S. Court of Appeals for the Fifth Circuit, which vacated the DOL Rule last month. The DOL has until June 13, 2018 to take the case to the U.S Supreme Court, but it’s unlikely to do so, given that it missed the deadline for the rehearing.  On April 18, 2018, the U.S. Securities and Exchange Commission (the “SEC”) held an open meeting at which it proposed, by a 4-1 vote to issue three releases regarding the standards of conduct for broker-dealers and investment advisers.  The guidance seeks to clarify the Investment Adviser fiduciary standard, while proposing to slightly increase broker-dealer standards to a lesser extent than the DOL’s Fiduciary Rule (which remains in limbo after getting struck down by the Fifth Circuit).  The proposed interpretation and rules will be open for public comment for 90 days once they are published in the Federal Register.

The proposed interpretation and rules will be open for public comment for 90 days once they are published in the Federal Register. The proposed Investment Adviser Interpretation intends to reaffirm and in some cases clarify certain aspects of the federal fiduciary duty that an investment adviser owes clients, including:

– duties of care; – provide advice in the best interests of clients; – seeks best execution; – act and provide advice and monitoring over the course of the relationship with a client; and – loyalty.

The Investment Advisers Interpretation release also seeks comment on requiring investment advisers to meet certain enhanced standards based on existing standards for broker-dealers, including standards related to licensing and continuing education, financial responsibility, and providing account statements to clients.

The SEC also proposed a Best Interest Regulation that mandates that a broker-dealer has a duty to act in the best interest of a retail customer when making a recommendation and without putting financial or other interest ahead of the customer. The proposal outlines three specific obligations:

– Disclosure obligation:disclose to the retail customer the key facts about the relationship, including material conflicts of interest; – Care obligation: exercise reasonable diligence, care, skill, and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and, (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest; and – Conflict of interest obligation: establish, maintain, and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed.

A proposed form CRS would provide for a short form disclosure form from broker-dealers and investment advisers, disclosing a relationship summary to retail investors. Additionally, the proposal would require investment advisers and broker-dealers and the financial professionals who work with them to be clear about registration status to avoid confusion with titles. The items needed to be included in the disclosure are as follows:

  • highlight the key differences in principal types of services offered;

  • the legal standards of conduct that apply to each;

  • the fees a customer might pay; and

  • certain conflicts of interest which may exist.

If you have questions about this Alert, please contact Daniel G. Viola at 212.573.8038, or Sam Lieberman at 212.573.8164,

 Link to Proposed Investment Advisers Interpretation –

Link to proposed Best Interest Regulation –

Link to Proposed Relationship Summary Disclosure Form –

Date: 05/02/2018