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FYI: SEC Adopts Reg BI and Related Interpretations

FYI: Moments ago, the SEC voted 3 to 1 on all items (Commissioner Jackson voting against; the fifth seat on the Commission remaining vacant at this time) to adopt Reg BI and related interpretations in final form.

A careful reading of the lengthy Adopting Releases and interpretations will be required to get a full understanding of the rules as adopted, including changes made since the proposal made in 2018. However, from oral presentations made by SEC Staff at the SEC’s open meeting today, the basic approach and rationale presented in the 2018 proposal appears to have survived largely intact.

These points were noted among others made at the open meeting today:

  • The SEC adopted 4 components of a new framework bearing on BDs and/or IAs when serving retail customers – Reg BI, Form CRS, an interpretation of the IA standard of conduct and an interpretation of the Advisers Act ‘BD exclusion.’ All of these components were part of the proposal made in 2018, except the interpretation of the BD exclusion, which is new. Although comment was solicited in 2018 on the BD exclusion in general, no specific proposed interpretation of the BD exclusion was offered for comment at that time.
  • The BD exclusion interpretation provides the Staff’s views on when a BD is outside the so-called ‘BD exclusion’ of the Advisers Act and would therefore presumably have to register as an adviser and meet Advisers Act fiduciary and other standards, if another exclusion or exemption is not available. According to Staff remarks at the meeting, the interpretation focuses on the situations where a BD has investment discretion over a customer’s account or when a BD agrees to provide account monitoring. Investment discretion will be generally interpreted as inconsistent with the BD exclusion, while certain temporary or limited account monitoring arrangements will not.
  • Apparently, unlike the proposal made in 2018, the rules as adopted today will require Form CRS data to be filed in a structured format in order to facilitate machine readability of the information and enhance an investor’s effort to compare among firms. In addition, IA firms that are not dually registered as BDs will evidently not have to provide comparison information about BDs in their Form CRS, and vice versa for BD firms that are not dually registered as IAs, as was contemplated by the 2018 proposals. Firms are also being given flexibility to decide whether Form CRS information will be delivered to clients/customers on paper, or provided in video or another format.
  • The rules as adopted will not specifically prohibit a BD not registered as an IA from using the term ‘adviser’ or ‘advisor’ to describe themselves. However, BDs that use the adviser/advisor term when they are not also registered as IAs will evidently be considered to be in violation of the relevant aspects of Reg BI.
  • While the IA interpretation sounds as if it largely reflects the contours of the interpretation proposed in 2018, the Staff has apparently undertaken to clarify some aspects of the interpretation that caused commenters concern.

Given comments submitted over the years by industry watchers, participants and consumer protection organizations among others, litigation over the new rules would not be a surprise.

According to Chair Clayton’s remarks at the open meeting today, the Commission is also undertaking significant retail investor educational efforts to help investors understand the differences between BDs and IAs. This will include online videos explaining basic information, as well as other efforts.

The Adopting Releases and interpretations will be accessible here once posted: https://www.sec.gov/rules/final.shtml.

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