For Individuals,For Plan Sponsors,Retirement Savings Plans,Custom

Securities and Exchange Commission (SEC) Proposes Enhanced Regulation of Broker-Dealers and Additional Guidance for Investment Advisers

July 6, 2018

Subsequent to the Fifth Circuit's ruling, on April 18, 2018 the SEC issued a set of comprehensive proposals that would alter the regulation of broker-dealers, particularly when making recommendations to retail customers, and provide additional guidance regarding investment advisers' existing fiduciary duty. The SEC is accepting comments on its proposals through August 7, 2018. The proposals are comprised of:

  • a requirement that broker-dealers act in a customer's "best interest" when making recommendations to retail customer (the industry is generally referring to this proposal as "Reg B.I.");
  • a proposed interpretative release to provide further guidance on the elements of an investment adviser's fiduciary duty to its clients;
  • a new "relationship summary" disclosure requirement for broker-dealers and investment advisers that would in no more than four pages lay out the basics of the firm's services, standards of conduct, fees and costs, conflicts of interest, and certain other information;
  • a limitation on broker-dealers and their associated persons using the term "adviser" or "advisor" as part of their name or title, unless such broker-dealers are registered as investment advisers; and
  • a requirement that broker-dealers and investment advisers prominently disclose the firm's registration status with the SEC (i.e., as a broker-dealer and/or investment adviser) in retail communications.

Explanatory guidance from the SEC indicates that a participant in a defined contribution plan would be considered a "retail" customer, and that a "recommendation" can include a rollover recommendation with regard to a security. While the new best interest standard for broker-dealers would include many obligations that apply to fiduciaries, the SEC's proposal states that it does not intend that broker-dealers would be subject to the "fiduciary" duty that applies to registered investment advisers.

There will likely be many comments to the SEC from stakeholders and the proposals could change significantly before finalization. The SEC's broker-dealer proposal, commonly called "Reg B.I.", builds on a variety of existing duties and obligations already imposed on broker-dealers under SEC and FINRA rules, and previous comments from industry members suggest broad support for a best-interest standard when investment professionals make recommendations to retail customers. The SEC proposal would be a significant enhancement of the duties owed to retail broker-dealer customers, including those with retirement plan accounts. Like the DOL's fiduciary rule, the changes in the SEC's proposal are expected to have the greatest impact in the retail market, including recommendations of rollovers to IRAs.

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