SEC Adopts Rules and Interpretations Including Form CRS and Regulation Best Interest

On June 5, 2019, the Securities and Exchange Commission announced the adoption of a package of rules and interpretations intended to increase transparency for retail investors in their relationships with investment advisers and broker-dealers. The package includes Regulation Best Interest, the Form CRS Relationship Summary, and two new interpretations of the Advisers Act of 1940.

The purpose of these actions is to make it accessible for retail customers to make informed decisions about which service providers best fit their needs while defining and enforcing standards of conduct for advisers and broker-dealers. Chairman of the Commission, Jay Clayton, remarked that these changes had been under consideration for nearly 20 years. The newly adopted items include:

1. Regulation Best Interest, which will require that broker-dealers act in the best interest of retail customer when making recommendations about securities transactions. The financial interests of the broker-dealer may no longer come before those of a customer.
2. Form CRS, a third component of Form ADV, calls for easy-to-understand information about advisers and broker-dealers. The summary-style format is intended to allow potential customers to draw comparisons when considering different service providers.
3. Clarification of fiduciary duty guidelines in the Advisers Act. The new, more detailed interpretation is based on how the Commission has decided on and enforced the rule in the past.
4. A new interpretation of the “solely incidental” prong of the Advisers Act, which provides additional guidance on when a broker-dealer’s advisory activities causes it to become an investment adviser.