SEC Regulation Best Interest Rule

June 17, 2019

On June 5, 2019 the SEC passed three proposals:

  • Form CRS
  • Investment Advisor Fiduciary Duty Interpretation
  • Regulation Best Interest

Form ADV Part 3 (Form CRS) – Customer Relationship Summary (IA-5247)

The new Form ADV Part 3, or Form CRS, will be a 2-4 page plain English document in narrative form. The initial filing and delivery of the Form will begin May 1, 2020 with a deadline of June 30, 2020. Thereafter, a copy must be delivered to clients before or at the time of the commencement of the relationship. It is also required to be posted on the firm’s website. The form will be comprised of 5 sections:                        

  • Introduction
  • Relationship & Services
  • Fees, Costs, Conflicts & Standard of Conduct
  • Disciplinary History
  • Additional Information

The document must also include “conversation starters” that are “noticeable and prominent,” for example using different fonts/sizes, text boxes, italics, etc. An example of a conversation starter would be:

  • Given my financial situation, should I choose an investment advisory service? Why or why not?
  • How will you choose investments to recommend to me?
  • What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?

Listen to this podcast for more information on Form CRS.

Standard of Conduct for Investment Advisors (IA-5248)

This release is a clarification of the fiduciary duty for investment advisers established in the Advisers Act. It firmly reiterates the fact that investment advisers are fiduciaries and must, at all times, serve the best interests of its client over its own, and this fiduciary duty cannot be contractually waived under any circumstance.  The main components of the fiduciary duty are:

  1. Duty of Loyalty
  2. Duty of Care
    • Duty to Provide Advice that is in the Best Interest of the Client;
    • Duty to Seek Best Execution; and
    • Duty to Provide Advice and Monitoring over the Course of the Relationship.

The release states that this interpretation does not create any new legal obligations for advisers. It does, however, outline various examples of how the SEC expects investment advisers to uphold their duty as fiduciaries and we recommend that you review this particular release in its entirety.

 

Because of the high standards to which AICPA members are already held, the clarification should not materially impact the standard of care for AICPA members who provide personal financial planning services.  

Regulation Best Interest (34-86031)

This regulation is only relevant to broker-dealers, and their registered representatives, and augments their “standard of conduct beyond existing suitability obligations.” It includes the following:

  1. Disclosure Obligation
    • Includes specific disclosures including, but not limited to, fees, type and scope of services, conflicts, limitations, etc.   
  2. Care Obligation
    • Broker-dealers must exercise reasonable diligence, care and skill when making a recommendation. The regulation “explicitly requires” consideration of costs related to the recommendation.
  3. Conflict of Interest Obligation
    • Broker-dealers must have written policies and procedures that identify, disclose, and/or eliminate conflicts of interest. The policies and procedures must:
      • Mitigate conflicts that create an incentive for the firm and/or its registered representatives to place their interests over that of the customer;
      • Prevent material limitations on offerings from causing the firm and/or its registered representatives to place their interests over the that of the customer; and
      • Eliminate sales contests, quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or types of securities within a limited period of time
  4. Compliance Obligation
    • Broker-dealers must have written policies and procedures aimed at compliance with Regulation Best Interest.

Because of the high standards to which AICPA members are already held, the Regulation Best Interest should not materially impact the standard of care for AICPA members who provide personal financial planning services.