SEC Fiduciary Rule Proposal — The Finer Points

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SEC FIDUCIARY RULE PROPOSAL
— THE FINER POINTS
Fiduciary Duties and Best Interest Standard Webinar

Timothy Welsh - Moderator
Senior Manager, Financial Services Risk Management, EY
Tonia Bottoms
Managing Director & Senior Managing Counsel, Pershing LLC
Susan Grafton
Partner, Dechert LLP
Meet Our Panel

Agenda
 Welcome and Introduction
 Overview of Recent SEC Proposals
 DOL Rule and SEC Proposal: Similarities and Differences
 Regulation Best Interest Overview for Broker Dealers
 Overview of New Form CRS Disclosure Requirements
 Operational Challenges of Form CRS
 Practical Impacts of the Investment Advisor Standard of Conduct Interpretation
 Final Thoughts
 Q & A

Overview of Recent SEC Proposals
 On April 18th, the Securities and Exchange Commission voted 4-1 to propose a package of
rules and interpretations intended to improve the retail investor experience and to provide
greater clarity regarding investors’ relationships with broker-dealers and investment advisers.
o Voted “Yes” with No Reservations: Clayton (Chair) and Pierce (Rep.)
o Voted “Yes” with Reservations: Piwowar (Rep., has indicated intention to leave SEC in July) and Jackson
(Dem., Term Ends in 2019)
o Voted “No”: Stein (Dem., Term Ended 2017 but can serve for additional 18 months following end of Term).
o It is likely that the Commission that would be called upon to vote on any subsequent adoption will look very
different than the split Commission that voted to propose with reservations expressed.
 Per Chairman Clayton, the proposals are intended to supplant DOL’s fiduciary rule and similar
state initiatives.
 Comments are due August 7th.

Overview of Recent SEC Proposals (Cont’d)
 The SEC’s proposals:
o Regulation Best Interest, a new standard of conduct for certain broker-dealers
o Interpretative guidance regarding the standard of conduct for investment advisers
o Solicitation of comment on additional substantive requirements for SEC-registered advisers and their
personnel
o New disclosure requirements for financial professionals
o Certain labeling rules

DOL Rule and SEC Proposal: Similarities and Differences
 DOL Rule governed under ERISA
o Focus on brokers that provide investment advice on Retirement Plans and other associated
investment vehicles
 SEC governs through Federal Securities laws
o SEC Regulation Best Interest applies to those that provide advice to “Retail Customers”
o Broker dealers and, to a lesser extent, investment advisors
 Conflicts of Interest
o DOL had more stringent requirements surrounding conflicts of interest than the SEC’s Reg BI
o Under SEC Reg BI, effectively disclosing a conflict of interest remedies the conflict
 (Despite this, the SEC’s “informed consent” approach requires disclosures to be “adequate”, otherwise the
conflict is not cured)

Regulation Best Interest Overview
 Requires broker-dealers and its associated persons to act in the best interest of
their “retail customers” when making recommendations of securities transactions
or investment strategies involving securities
o “Retail customer” would be defined as any person who receives a recommendation about a
securities transaction or investment strategy involving securities from a broker-dealer, and who
uses the recommendation primarily for personal, family or household use
o “Recommendation” would have the same definition as used by FINRA; at least initially
 Not placing the broker-dealer or registered representative’s interests (financial or
other) ahead of the customer
Impacts:
 Compensation
 Product-Specific Activities

Regulation Best Interest Overview (Cont’d)
 Broker Dealers will satisfy the best interest requirement if they satisfy
following three obligations:
o Disclosure Obligation:
 Prior or at time of recommendation, reasonably disclose, in writing, material facts about
scope and terms of relationship, including all material B-D conflicts of interest (reference
form CRS)
o Care Obligation:
 Exercise reasonable “diligence, care, skill” to (1) Understand potential risks and rewards of
the recommendation and have a reasonable basis to believe that the recommendations
could be in the “best interest of some retail customer; (2) have a reasonable basis to
believe that the recommendation is in the “best interest” of the retail customer to whom
it is being made based on the customer’s investment profile; and (3) have a reasonable
basis to believe that a series of recommended transactions, even when viewed in
isolation, is not excessive and is in the retail customer’s “best interest”
o Conflicts of Interest Obligation:
 Broker-dealer required to establish, maintain, and enforce written policies and procedures
designed to identify and (1) disclose or eliminate all material conflicts of interest
associated with the recommendation; and (2) disclose and mitigate, or eliminate all
material conflicts of interest arising from financial incentives associated with the
recommendation

Overview of New Form CRS Disclosure Requirements
 Proposed new Form CRS (Customer or Client Relationship Summary) would be a
standardized four-page disclosure document addressing, among other items:
o Services to be provided;
o Legal standard of conduct applicable to the services;
o Fees and costs the retail investor will pay; and
o Conflicts of interest that may exist in the relationship.
 Differences in disclosure requirements for:
o Broker-Dealers;
o IAs;
o Dual Registrants
 Restrictions on use of titles
o “adviser” vs. “advisor”
 Prominence of disclosure of registration status (e.g., BD or IA) in retail
communications

Overview of New Form CRS Disclosure Requirements (Cont’d)
 In certain circumstances, a relationship summary would need to be provided
to existing retail clients, including when a retail client requests a summary.
 The SEC also proposed “labeling” rules under the Exchange Act and Advisers
Act of 1940 that would require broker-dealers and investment advisers to
disclose if they are a registered broker-dealer, registered investment adviser,
or both.
 The SEC also proposed to restrict the use of the titles “adviser” and “advisor”
to registered investment advisers or associated persons of registered
investment advisers.

Operational Challenges of Form CRS
 What are some operational challenges to implementing the new CRS
disclosures?
o Includes delivery to High Net Worth and Qualified Investors
o Potential for increased investor confusion, especially with dual-hatted persons
o Costly; should be integrated with existing disclosures (e.g., Form ADV for advisers)

Practical Impacts of the Investment Advisor Standard of
Conduct Interpretation
 What are the practical impacts of the interpretation of Investment Adviser
Standard of Conduct?
 Investment Adviser fiduciary duty cannot be disclosed or negotiated away.
o Duty of Care includes:
 Providing advice in the best interest of the client;
 Seeking best execution where adviser selects broker-dealer; and
 Providing ongoing advice and monitoring
o Duty of Loyalty, which includes:
 Disclosure of all material facts relating to the relationship, which are sufficient for the
client to decide to consent to any conflicts of interest
 New requirements for Investment Advisers, including:
o Licensing and Continuing Education for personnel of SEC-registered Investment Advisers;
o Delivery of Account Statements to clients with investment advisory accounts; and
o Financial responsibility for SEC-registered investment advisers, including fidelity bonds

Final Thoughts
 What are you hearing from your peers?
 What are the immediate actions being taken?
 Are there State approaches or proposals to consider?
 What approaches will firms take to the “identification of conflicts of
interest?”

Q&AQUESTIONS & ANSWERS SESSION
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SEC Fiduciary Rule Proposal — The Finer Points

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