How transparent are your relationships with investors? The SEC wants to know…

Last week, the Securities and Exchange Commission (SEC) voted to propose a package of rules and interpretations it hopes will enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers without sacrificing investors’ access to advisory services and investment products.

Regulation Best Interest

In a perfect world, one supposes, the SEC wouldn’t need to issue a Best Interest Regulation. But we all know; the world of financial services is occasionally imperfect and occasionally bad actors do act badly. So, under the SEC’s proposed Regulation Best Interest, a broker-dealer is required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy. According to the SEC, 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 when making investment recommendations.

The Commission also proposes to reaffirm and, in some cases, clarify its views of the fiduciary duty that investment advisers owe to their clients.  The goal is to ensure that all parties have a clear idea of an adviser’s legal obligations.

Is form CRS an investing prenup?

Kind of, but it’s more of an online dating profile designed to address investors confusion about the nature of their relationships with investment professionals. A new short-form disclosure document — a customer or client relationship summary, Form CRS provides retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and supplements other more detailed disclosures.  For advisers, additional information can be found in Form ADV.  For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.

You say potato, I say…potato?

The SEC also proposes restricting certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.  Investment advisers and broker-dealers would also need to disclose their registration status with the Commission in certain retail investor communications.

The goal, according to SEC Chairman Jay Clayton is to “increase investor protection and the quality of investment services by enhancing investor understanding and strengthening required standards of conduct…while simultaneously preserving investors’ access to a range of products and services at a reasonable cost

 What’s the difference between an investment advisor and a broker-dealer?

That’s one of the questions the SEC wants clarified too often, the Commission has found, that retail investors do not fully understand the differences between investment advisers and broker-dealers. This confusion, the Commissioners say, could lead them to choose the wrong kind of investment professional for their particular needs, or to receive advice that is not in their best interest. So, the Commission intends to strengthen of conduct that broker-dealers owe to their customers, reaffirming and, in some cases, clarifying the standard of conduct that investment advisers owe to their clients, and providing additional transparency and clarity for investors through enhanced disclosure to help them understand who they are dealing with, and why that matters.

 Patrina believes in transparency too, especially in compliance

While the new Regulation Best Interest is intended to help broker-dealer and investment adviser clients, it does add an extra layer of burden and responsibility square on the shoulders of compliance professionals…like you.  That’s where Patrina can help. For more than 25 years, we’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered…transparently!