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Rules & Regulations

SEC Chair Clayton Stumps for Improvements in Market for Investment Advice

June 26, 2018

by Howard Haykin


In his recent remarks to the SEC Investor Advisory Committee, SEC Chair Jay Clayton reiterated his desire for increased transparency and the elimination of long-standing confusion in the market for investment advice. To that end, the Commission has proposed rules and interpretations that were released for comment on April 18, 2018.


REGULATION BEST INTEREST.   As proposed, … a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Incorporating the essential element from fiduciary standards, Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.


A broker-dealer would discharge this duty by complying with each of 3 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.

►    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.


FORM CRS – CUSTOMER RELATIONSHIP SUMMARY.   As proposed, …investment advisers and broker-dealers, and their respective associated persons, would be required to provide retail investors a relationship summary.  This standardized, short-form (4 page maximum) disclosure would highlight key differences in the 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 that may exist.

Investment advisers and broker-dealers, and the financial professionals who work for them, would be required to be direct and clear about their registration status in communications with investors and prospective investors. Certain broker-dealers, and their associated persons, would be restricted from using, as part of their name or title, the terms “adviser” and “advisor” - which are so similar to “investment adviser” that their use may mislead retail customers into believing their firm or professional is a registered investment adviser.


Toward this end, the SEC has been holding a series of roundtables around the country - designed to ensure that the Commission learns how its proposals would affect Main Street investors. The next 2 roundtables are planned for Miami and Denver later this summer.