SEC Interpretation on the Standard of Conduct of Investment Advisers

August 15, 2018

The U.S. Securities and Exchange Commission (“SEC”) released a package of new rule proposals in April of 2018. The SEC’s proposed rules and guidance can be found here.

These rule proposals by the SEC included Regulation Best Interest and a new disclosure document, Form CRS. The proposal also included a proposed interpretation, from the SEC, on the standard of conduct required of an investment adviser. This interpretation focused on an investment adviser’s fiduciary duty which includes the “duty of care” and “duty of loyalty” according to the SEC.

The duty of care, according to the SEC, requires an investment adviser to provide advice that is in a client’s best interest. This means an investment adviser must make inquiries as to the client’s financial situation, level of financial sophistication, investment experience, and objectives so they can provide advice to each client’s unique situation. An investment Adviser is required to seek best execution when responsible for selecting a client’s broker-dealer.

Additionally, when executing a securities transaction on behalf of a client, the investment adviser needs to try to maximize value for the client.  The duty of care also requires an investment adviser to provide ongoing advice and monitoring throughout the course of their relationship with a client.

The SEC also noted that when an investment adviser is discussing its conflicts of interest, the statement within the investment adviser’s disclosure documents that a conflict “may” exist is insufficient to properly disclose the conflict.   Consequently, all investment advisers should immediately review their disclosure documents for the term “may” in light of this and other recent guidance by the SEC.  For more detailed guidance on conflicts of interest, please refer to our Conflicts of Interest – Checklist available in our online subscription account at no charge to any of our current Bronze, Silver, Gold and Platinum clients or can be purchased a la carte for $175 by clicking here.

Your investment adviser firm can learn more about the SEC’s proposed Regulation Best Interest as it relates to investment advisers and specifically the proposed new Form ADV Part 3 at our upcoming Investment Adviser Compliance Conference in Omaha, Nebraska on Wednesday, August 22 and Thursday, August 23, 2018.  For additional details and the conference registration page, please click here.

Posted by Grant Parr
Labels: Conflict of Interest, Regulation Best Interest, SEC