Focus Perspective: Regulation Best Interest (“Reg BI”)

On June 5th, the SEC adopted new Regulation Best Interest (“Reg BI”), the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act (“IA Act”). There has been a lot of press about Reg BI, from those who like it and those who say it doesn’t do enough, but my interest is in the interpretations under the IA Act, especially the “Commission Interpretation Regarding Standard of Conduct for Investment Advisers.”

We have selected some language that we found to be very familiar:

“An adviser’s fiduciary duty is imposed under the Advisers Act in recognition of the nature of the relationship between an adviser and its client—a relationship of trust and confidence. The adviser’s fiduciary duty is principles-based and applies to the entire relationship between the adviser and its client. The fiduciary duty follows the contours of the relationship between the adviser and its client, and the adviser and its client may shape that relationship by agreement, provided that there is full and fair disclosure and informed consent.” (emphasis added)

“While the application of the investment adviser’s fiduciary duty will vary with the scope of the relationship, the relationship in all cases remains that of a fiduciary to the client. In other words, an adviser’s federal fiduciary duty may not be waived, though it will apply in a manner that reflects the agreed-upon scope of the relationship.  A contract provision purporting to waive the adviser’s federal fiduciary duty generally, such as (i) a statement that the adviser will not act as a fiduciary, (ii) a blanket waiver of all conflicts of interest, or (iii) a waiver of any specific obligation under the Advisers Act, would be inconsistent with the Advisers Act, regardless of the sophistication of the client.” (emphasis added)

“An investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty.”

“The duty of care includes, among other things: (i) the duty to provide advice that is in the best interest of the client, (ii) the duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and (iii) the duty to provide advice and monitoring over the course of the relationship.” (emphasis added)

“The duty of loyalty requires that an adviser not subordinate its clients’ interests to its own. In other words, an investment adviser must not place its own interest ahead of its client’s interests. To meet its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship. Material facts relating to the advisory relationship include the capacity in which the firm is acting with respect to the advice provided. This will be particularly relevant for firms or individuals that are dually registered as broker-dealers and investment advisers and who serve the same client in both an advisory and a brokerage capacity.” (emphasis added)

“In addition, an adviser must eliminate or at least expose through full and fair disclosure all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested.”

And, lest you think for some reason that this would not apply to you:

“As of December 31, 2018, there were 13,299 investment advisers registered with the Commission with over $84 trillion in assets under management as well as 17,268 investment advisers registered with states with approximately $334 billion in assets under management and 3,911 investment advisers who submit Form ADV as exempt reporting advisers. As of December 31, 2018, there are approximately 41 million client accounts advised by SEC-registered investment advisers.”

“Because this Final Interpretation interprets an adviser’s fiduciary duty under section 206 of the Advisers Act, this interpretation would be applicable to both SEC and state-registered investment advisers, as well as other investment advisers that are exempt from registration or subject to a prohibition on registration under the Advisers Act.” (emphasis added)

See Commissions Interpretation


And a very little bit about Form CRS:

“If you are already registered or have an application for registration pending with the SEC as an investment adviser before June 30, 2020 you must electronically file, in accordance with Instruction 7.A., your initial relationship summary beginning on May 1, 2020 and by no later than June 30, 2020 either as: (1) an other-than-annual amendment or (2) part of your initial application or annual updating amendment. See Advisers Act rules 203-1 and 204-1.”

“If you file an application for registration with the SEC as an investment adviser on or after June 30, 2020, the Commission will not accept any initial application that does not include a relationship summary. See Advisers Act rule 203-1.”

Good news is that the instructions for Form CRS are only 18 pages long. Definitions are at page 10 in the link below and instructions for filling out the Form start on page 11.

See Instructions to Form CRS


We do have to disclose that the Commissioners did not vote unanimously to adopt these rules, Commissioner Jackson stated:

“I hoped to join my colleagues in announcing that the Nation’s investor protection agency has left no doubt that, in America, investors come first.

Sadly, I cannot say that. Rather than requiring Wall Street to put investors first, today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice. Even worse, contrary to what Americans have heard for a generation, the Commission today concludes that investment advisers are not true fiduciaries. Today’s actions fail to arm Americans with the tools they need to survive the Nation’s retirement crisis. Accordingly, I respectfully dissent.”

Commissioner Jackson closed his remarks with this statement:

“I call on all of you who have been so crucial to this effort to keep fighting. Encourage investors to seek out true fiduciary advice from financial professionals who have chosen to hold themselves to higher standards than those we’ve set today. Keep pushing for meaningful protections in the States who choose to give their citizens the best chance for a safe retirement. And, most importantly, do not stop the critical work of advocating for the financial security of all Americans.”

See Commissioner Statement


Our Perspective

As Commissioner Jackson encouraged states to adopt their own fiduciary regulations, we should note that several states started putting together fiduciary protections for their own residents as far back as the demise of the DOL Fiduciary Rule. States that have been identified as considering or actively working on fiduciary standards: New Jersey, Maryland, Nevada, New York, Connecticut, Massachusetts, California, Missouri, South Carolina, South Dakota, Illinois, and Oregon.

We believe that few of us have wallowed through the 524 pages of the “Form CRS Relationship Summary; Amendments to Form ADV Agency.” We would rather leave that to the law firms to interpret and then read their summaries. We did make it through the 41 pages of “Commission Interpretation Regarding Standard of Conduct for Investment Advisers,” and we would advise that anyone affiliated with a broker-dealer should read the 27 pages of the “Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser,” which was actually kind of interesting.

We are curious to see how the new regulations will work, we are curious to see how many advisers will file Form CRS before it is required, and we would expect to see many Forms returned to sender when the requirement to file kicks in.

Late note: The Senate finally confirmed Allison Lee to serve as an SEC Commissioner, replacing Commissioner Kara Stein, who left in January.  Lee spent several years at the SEC from 2005 to 2018, most recently serving as counsel to Commissioner Stein. Reminder, the SEC issues Risk Alerts to tell us what issues they are concerned about.  We should be concerned about the same issues and be able to demonstrate that we are.


Comments are closed.