Standards of Conduct for Investment Advisers and Broker-Dealers

Nov 1, 2019 | ALI CLE Legal Journals, Securities

On April 18, 2018, the Securities and Exchange Commission (SEC) proposed a package of rulemakings and interpretations designed “to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers.”

The package consisted of:

  1. Proposed interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940 (Advisers Act), i.e., the fiduciary obligations advisers owe to their clients;
  2. Proposed  Regulation  Best  Interest  (Regulation BI) under the Securities Exchange Act of 1934 (Exchange Act), which would set a standard of conduct for broker-dealers (and associated per- sons) when recommending securities to retail customers;
  3. Proposed Form CRS, a three-page standardized “relationship summary” that  must  be  provided  to retail clients of advisers and customers of broker dealers at the beginning of the relationship. Form CRS is designed to explain to investors the nature of the relationship between the financial professional and the client.

The proposed rules differ significantly the SEC staff’s 2011 report to Congress, which recommended that the SEC adopt a uniform standard of care for broker-dealers and investment advisers.

II. PROPOSED INVESTMENT ADVISER INTERPRETATION

Investment advisers have long been held to owe their clients fiduciary duties. The nature and scope of those duties have been developed over the years by case law, SEC and staff interpretations, and enforcement actions. In the proposing release, the explained that it sought to “reaffirm and—and in some cases clarify— certain aspects of the fiduciary duty.”

The SEC release explained that an adviser’s fiduciary duty comprises a duty of care and a duty of loyalty.

The Practical Lawyer

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The Practical Lawyer

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