Wednesday, August 08, 2018

IAA expresses concerns about SEC’s proposed standards for financial professionals

By Amanda Maine, J.D.

The Investment Adviser Association (IAA), in a comment letter to the SEC, raised a number of concerns with the Commission’s package of proposals regarding the standards of conduct for broker-dealers and investment advisers. While IAA believes that the proposals take important steps towards strengthening the standards of conduct and reducing investor confusion, the comment letter outlines several issues that IAA would like to see addressed before the rules are finalized.

Reg BI. The letter notes that broker-dealers are excluded from the Investment Advisers Act and its fiduciary duties of both loyalty and care if the investment advice they provide is “solely incidental” to their broker-dealer business and they receive no “special compensation” for their services. IAA expressed concern about what it believes is the limited scope of the proposed standard and advised that the Commission should reconsider when broker-dealers should be able to rely on the solely incidental exclusion. The narrow scope and application of proposed Regulation Best Interest (Reg BI) could result in a gap in retail investor protection. IAA recommends that all advisory activities that broker-dealers agree to provide (such as ongoing monitoring for purposes of recommending changes in investments) should be covered by either Reg BI or the fiduciary standard under the Advisers Act.

In addition, IAA called on the SEC to “more appropriately define” what advice is considered to be solely incidental to brokerage activities. In particular, IAA recommends the position previously taken by the SEC that discretionary investment advice should not be deemed solely incidental to brokerage services. IAA’s letter notes that while the Commission’s 2005 rule relating to the Advisers Act solely incidental exclusion was later vacated, the court did not question the validity of the Commission’s interpretation on investment discretion. IAA also cited, and agreed with, a 2007 interpretive rule stating, “when a broker-dealer exercises investment discretion, it is not only the source of investment advice, it also has the authority to make the investment decision,” and warrants the protections under the Advisers Act.

However, IAA stated that it supports the proposal to require more explicit broker-dealer disclosures and recommended that the disclosures be integrated more closely with the SEC’s proposed relationship summary.

Form CRS. Regarding the SEC’s proposed Form CRS, which would require registered investment advisers, broker-dealers, and dual registrants to deliver a standalone relationship summary containing short and concise information about their advisory or brokerage relationships, IAA supports the idea of such transparency. However, IAA believes that Form CRS as proposed may exacerbate the investor confusion it was intended to address. IAA makes the following recommendations: that the SEC (1) publish the findings of its investor testing of proposed Form CRS; (2) provide the educational comparison between investment advisers and broker-dealers on its website rather than requiring firms to include disclosures about other firms’ services; (3) streamline the relationship summary to eliminate technical language and industry jargon; (4) leverage important investor disclosures, including those relating to conflicts of interest, from Form ADV brochures; and (5) provide a longer compliance date for new relationship summaries.

Title restrictions. IAA believes that the SEC’s proposed restrictions on broker-dealers using the titles “adviser” or “advisor” are a step in the right direction but recommends that the Commission take further steps toward reducing investor confusion in this space. These steps include what IAA describes as misleading marketing practices, noting as an example advertisements stating “we do it all” and other verbiage that would leave a reasonable investor with the impression that the firm will provide ongoing investment advice pursuant to a relationship of trust and confidence.

Fiduciary standard. IAA expressed its support that the SEC has reaffirmed the fiduciary duty under the Advisers Act and does not believe that is necessary for an interpretation on the fiduciary duty. IAA did, however, offer recommendations to further refine and clarify the SEC’s proposal regarding the fiduciary rule, including a more principles-based approach to the duty of care discussion, particularly related to the discussion of a client’s investment profile.

IAA also recommends that, regarding the discussion on the duty of loyalty, the SEC clarify what a full and fair disclosure of potential conflicts of interest entails, noting that such disclosure for an institutional client can differ substantially from disclosures for a retail client. IAA also asks that the SEC make clear that advisers are not required to obtain express consent but may infer consent from facts and circumstances to make an informed decision.