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SEC Set to Finalize Reg BI, Form CRS, Interpretive Bulletin

Regulatory Agencies

While speculation has run rampant over the past several months, we may finally get some answers today about what the Securities and Exchange Commission’s final investment advice rulemaking will encompass. 

At a public hearing scheduled to begin at 10:00 a.m. ET today, the SEC is scheduled to review, and probably adopt, new rules on the standards of conduct for broker-dealers and investment advisers. A live webcast of the meeting can be viewed on the SEC’s website, here

According to the meeting agenda, the Commission “will consider whether to adopt a new rule to establish a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities.” That new rule is, of course, Regulation Best Interest, which was first proposed as part of a regulatory package in April 2018.   

In addition, the SEC will consider whether to adopt the proposed Form CRS Relationship Summary requiring RIAs and registered broker-dealers to provide a brief relationship summary to retail investors, as well as a new Commission interpretation of the standard of conduct for investment advisers.

The Commission also will consider whether to publish its interpretation of the “solely incidental” prong of section 202(a)(11)(C) of the Investment Advisers Act of 1940. Section 202(a)(11)(C) excludes from the definition of investment adviser a broker or dealer whose performance of such advisory services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation for those services – the “broker-dealer exclusion.” Here, the Commission believes it’s appropriate to again consider the scope of the exclusion regarding a broker-dealer’s exercise of investment discretion in light of both the Regulation BI and the Relationship Summary.

The five-member Commission currently consists of four members: Democrat Robert Jackson, Jr. and Republicans Hester Peirce, Elad Roisman and Chairman Jay Clayton. Coincidentally, the Senate Banking Committee is also holding a hearing today to consider the nomination of Allison H. Lee to serve on the SEC.

If Lee is confirmed by the Senate, she would replace Democrat Kara Stein, who left the Commission at the beginning of this year. Jackson, whose term expires next month, has announced that he plans to leave by this fall. 

Meanwhile, finalization of the SEC rules comes as the Department of Labor has finally given a time-frame on its fiduciary rule rewrite. In late May, the DOL published its updated regulatory agenda showing that the agency has set a target date of December 2019 to issue a Notice of Proposed Rulemaking.  

DOL officials over the last few weeks have signaled that the agency’s new rulemaking would piggyback on the SEC’s rulemaking. In fact, Assistant Secretary Preston Rutledge, head of the Employee Benefits Security Administration, indicated June 3 at a conference by the Organization for Economic Cooperation and Development that the DOL will align its rulemaking with the SEC’s Reg BI “in order to mitigate the confusion that different regulations can create,” according to a tweet from the U.S. OECD account.