SEC responds to court order vacating the Fiduciary Rule

Since its adoption, the "fiduciary rule" promulgated by the U.S. Department of Labor (DOL) has received much attention, particularly in the last few weeks, after the U.S. Court of Appeals for the Fifth Circuit issued an opinion vacating the fiduciary rule in its entirety. Absent an appeal or request for rehearing, the Fifth Circuit is scheduled to issue a mandate in early May vacating the rule in toto.

To many, the concept of the DOL promulgating a rule setting a standard of conduct for certain actors in the investment industry seemed misplaced. The SEC, in particular, took notice and feverishly developed three new proposals with respect to the primary areas earmarked by the DOL rule.

Last Wednesday (April 18), the Securities and Exchange Commission (SEC) submitted for public comment three proposals intended to raise the standards of conduct applicable to broker-dealers; clarify standards of conduct applicable to registered investment advisers (RIAs); and encourage heightened understanding of the relationship between broker-dealers and RIAs and their clients.

The three proposals are identified as:

Regulation Best Interest (SEC Release No. 34-83062)

Form CRS Relationship Summary , Amendments to Form ADV, Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles (SEC Release No. 34-83063)

Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers (SEC Release No. IA-4889)

"Regulation Best Interest" is a 407-page proposal that seeks to heighten the standard of conduct applicable to broker-dealers. The proposal identifies three main areas as critical to meeting the new standard: full disclosure, appropriate care, and mitigation of conflicts of interest. As pointed out by the SEC Commissioners, however, the proposal does not provide an actual definition of "best interest," which could certainly result in confusion from investors and financial professionals.

At a mere 38 pages, the proposal interpreting the standard of conduct applicable to RIAs is by far the shortest of the three proposals. It simply seeks to provide an official SEC interpretation of the standard of conduct applicable to RIAs under the Investment Advisers Act of 1940.

The third proposal is 471 pages and intends to bolster a client's understanding of the relationship with his or her financial professional. The proposal requires, among other things, that broker-dealers and RIAs disclose various items to clients on a new standardized Form CRS Relationship Summary package, which would include a tear-off sheet listing questions that might be helpful for the client to ask his or her financial professional. The proposal also restricts the use of certain terms, such as "adviser" and "advisor."

Takeaways

After listening to the SEC's Open Meeting on April 18, 2018, we have identified our top five takeaways:

First, although all five Commissioners expressed numerous concerns with the proposals, they voted 4-1 to submit all three proposals for public comment, which will be open for 90 days after publication in the Federal Register.

Also, the Commissioners' primary concerns with the proposals were their length (approximately 1,000 pages and 1,800 footnotes in total) and, in Regulation Best Interest, the lack of an express definition of "best interest."

Third, if substantial revisions are not made to the proposals, it is highly unlikely they would be approved as final rules.

Fourth, the SEC recognized that the "eyes of the world" were on it to fill the void after the Fifth Circuit issued its recent opinion vacating the DOL's fiduciary rule.

Finally, as the Commissioners expressed great anticipation in reviewing the public's comments on the proposals, perhaps more than ever public comment will be vital for these proposals to reach their final form.

Comments

This area of the law is in an extreme state of flux. We encourage you to review the three proposals and submit comments if you wish to do so.