Informal guidance issued by the Securities and Exchange Commission cautions investment advisers about their use of the term “fiduciary” on Form CRS—but an industry group argues the guidance goes too far.
A March 30 update to the SEC’s “Frequently Asked Questions on Form CRS” addressing the question of whether an investment adviser can use the terms “fiduciary” or “fiduciary duty” in its Form CRS explains that advisers can use the term, but only to the extent permitted by the Form CRS Instructions and the applicable item.
In the Q&A, the staff reminds firms that Form CRS “is designed to be a short and accessible disclosure for retail investors that helps them to compare information about firms’ brokerage and/or investment advisory offerings” and that“the relationship summary is designed to serve as disclosure, rather than marketing material.”
For certain items, the instructions provide that firms must use the prescribed language without modification, and therefore, an investment adviser cannot add the term “fiduciary” to prescribed language, the SEC notes. For example, the instructions require firms to provide a consistent articulation of their required legal obligations using the prescribed statement in Item 3.B.(i) to minimize investor confusion, the Q&A emphasizes, adding that the instructions do not permit firms to state their required standard of conduct using their own wording.
For items without prescribed language, the SEC staff “cautions against an investment adviser using the terms ‘fiduciary’ or ‘fiduciary duty’ where doing so would be extraneous or unresponsive to the particular item or would involve, or suggest, exaggerated or unsubstantiated claims, and any use of the terms must be accurate and not misleading.”
According to the staff’s view, embellishing factual statements about the capacity or services of an investment professional or firm with phrases such as “an investment adviser who is held to the fiduciary standard,” is likely to be inappropriate, the Q&A explains.
Similarly, the SEC staff cautions against describing the fiduciary duty as a “higher standard” or the “highest standard.” In addition, it is likely misleading and nonresponsive for an investment adviser to represent that the fiduciary duty alone mitigates or eliminates conflicts of interest, the SEC says.
Calls to Clarify
Meanwhile, the Institute for the Fiduciary Standard argues that the SEC staff opinion essentially seeks to eliminate the word “fiduciary” from SEC investment adviser disclosure.
“Prior to this March 30 staff opinion, mentioning fiduciary status was deemed fine. Advisers could cite and describe an established fact of law. There was an open door. Now the new 765-word staff opinion slams this door shut,” Knut Rostad, president of the Institute for the Fiduciary Standard, said at an April 13 press briefing.
Rostad contends that the staff opinion leaves “no plausible and meaningful way” for an investment adviser to tell investors about their fiduciary status, contending that the staff opinion regards certain phrases—such as “an investment adviser who is held to the fiduciary standard” or a “higher standard”—as inappropriate.
The IFS president further emphasized that, in the context of making Form CRS an information piece and not a marketing piece, being able to use the word fiduciary appropriately, as opposed to exaggerating it, is only going to be beneficial. Because of notoriety of the word fiduciary, investors know that is something they should be looking for and let RIAs do so, he explained.
Moreover, Rostad suggested that the staff opinion “derides a centuries’ old legal principle infused in the ‘40 Act [Investment Advisers Act of 1940]” and affirmed by the Supreme Court (SEC v. Capital Gains Research Bureau, Inc., et al), and that it seems to seek to eliminate the word fiduciary and rely on the undefined term “best interest.”
Rostad was joined by Jeffrey Lang, attorney and shareholder at Stark & Stark, who suggested that the FAQ should go further in explaining what is an appropriate use of, or reference to, the fiduciary terminology. The pair further called on the SEC commissioners to override the staff opinion and clarify how the fiduciary term can be included in the context of the prescribed language to help avoid being considered as extraneous material.
“A suggestion that the adviser is held to a fiduciary standard is noted as inappropriate, when this statement may be factually correct. Additional guidance on how to indicate this language in a compliant manner would be very helpful. Much of the CRS language and format is prescribed,” Lang emphasized.
Rollover Recommendations
The SEC also on March 30 issued a staff bulletin providing views on how broker-dealers, investment advisers and their associated persons can satisfy their obligations to retail investors when making account recommendations—particularly with respect to dually registered or affiliated firms, as well as dually licensed financial professionals.
Among the lengthy list of issues addressed, the SEC addresses rollover recommendations, noting that to evaluate any recommendation to transfer assets out of an employer’s plan or between retirement accounts, the professional needs to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan.
“When making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest,” the bulletin advises. To that end, it notes that there are specific factors relevant to rollovers that should be considered when making a rollover recommendation, including:
- costs and level of services available;
- features of the existing account, including costs;
- available investment options;
- ability to take penalty-free withdrawals;
- application of required minimum distributions;
- protection from creditors and legal judgments; and
- holdings of employer stock.
In addition to Reg BI and the IA fiduciary standard, the bulletin reminds financial professionals that, if they plan to rely on Prohibited Transaction Exemption 2020-02 (PTE 2020-02), they should review guidance from the Department of Labor on factors to consider in making a rollover recommendation, as well as relevant documentation requirements.
