SEC investment adviser proposal

On April 18, 2018, the SEC proposed (1) a “Regulation Best Interest” providing new conduct standards for broker-dealers, (2) an “Interpretation Regarding Standard of Conduct for Investment Advisers” that “reaffirms, and in some cases clarifies, certain aspects of the fiduciary duty that an investment adviser owes to its clients,” and (3) a requirement that investment advisers and broker-dealers provide retail investors a “Relationship Summary,” a standardized, short-form disclosure highlighting “key differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.”

While we are not securities law experts, we will be following this process because, as we discussed in our article on SEC’s Regulation Best Interest proposal, the SEC proposals indirectly affect sponsor retirement plan fiduciaries. Retirement plan fiduciaries have a legal obligation under ERISA to monitor the conduct of plan service providers, including, e.g., call center operators and participant advice and education providers affiliated with financial services firms. Those service providers (call center operators, etc.) will often be broker-dealers, investment advisers or both. And as the rules applicable to those service providers change, what the fiduciary is obligated to monitor also changes.

In this article we discuss the SEC’s proposed Interpretation Regarding Standard of Conduct for Investment Advisers.


Service providers interacting with plan participants – including call center operators, education providers, advice providers or managed account advisers – may wear a variety of hats, e.g., “broker,” “investment adviser” or “mere service provider.”

Oversimplifying a lot, as a general matter, a service provider may be acting as a “broker” when it is collecting a commission and may be acting as an investment adviser when it is receiving an explicit fee for providing advice. While an investment adviser may, for instance, provide “one-off” advice for a flat fee, in the past the most typical investment adviser relationship has involved a managed account, where the adviser provides ongoing discretionary management for a fee, generally a percent of the assets under management. As the SEC described it in its Relationship Summary proposal:

We believe that these features – ongoing advice, discretion, standards of conduct, and, for wrap fee programs, certainty in pricing – distinguish advisory accounts and wrap fee programs from brokerage accounts.

In its package of proposals published on April 18, 2018, the SEC rejected recommendations by some that it “adopt and implement a uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers.” (Quoting the proposing release with respect to the SEC’s “Regulation Best Interest.”)

Instead, the SEC proposed a new standard of conduct for brokers (see our article The SEC proposes broker/investment adviser conduct rules). At the same time, it proposed the “Interpretation Regarding Standard of Conduct for Investment Advisers” that is the subject of this article, explaining that:

In light of the comprehensive nature of our proposed set of rulemakings, we believe it would be appropriate and beneficial to address in one release and reaffirm – and in some cases clarify – certain aspects of the fiduciary duty that an investment adviser owes to its clients under section 206 of the Advisers Act.

Standard of conduct

As preliminary matter: “An investment adviser is a fiduciary, and as such is held to the highest standard of conduct and must act in the best interest of its client.” This is in contrast to a broker; as we discussed, in its proposed Regulation Best Interest the SEC rejected imposing a fiduciary standard on brokers. (It is arguable, however, that the standard that it is proposing for brokers is substantively nearly identical to a fiduciary standard.)

Generally (and similar to the structure of ERISA’s general fiduciary standards), under the SEC proposal an investment adviser has a duty of care and a duty of loyalty.

Duty of care: The proposal “reaffirms and clarifies” that an adviser has a duty to act and to provide advice that is in the best interest of the client. This duty includes, among other things:

(i) [T]he duty to act and to provide advice that is in the best interest of the client, (ii) the duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and (iii) the duty to provide advice and monitoring over the course of the relationship.

Duty of loyalty: Generally, an investment adviser must “put its client’s interests first.” In this regard, the adviser may not “favor its own interests over those of a client or unfairly favor one client over another.” It must make “full and fair disclosure to its clients of all material facts,” and it must “seek to avoid conflicts of interest with its clients, and, at a minimum, make full and fair disclosure of all material conflicts of interest that could affect the advisory relationship.” Unlike the standard applicable to brokers – who are required not only to disclose but also to mitigate financial conflicts – advisers are only required to disclose conflicts, unless (for instance) “(i) the facts and circumstances indicate that the client did not understand the nature and import of the conflict, or (ii) the material facts concerning the conflict could not be fully and fairly disclosed.”

Issues relevant to retirement plans

The “Proposed Interpretation” provides some examples of the application of these principles that will be relevant to retirement plans. With respect to the “best interest” requirement of an investment adviser’s “duty of care,” the SEC states:

We believe that an adviser could not reasonably believe that a recommended security is in the best interest of a client if it is higher cost than a security that is otherwise identical, including any special or unusual features, liquidity, risks and potential benefits, volatility and likely performance. For example, if an adviser advises its clients to invest in a mutual fund share class that is more expensive than other available options when the adviser is receiving compensation that creates a potential conflict and that may reduce the client’s return, the adviser may violate its fiduciary duty and the antifraud provisions of the Advisers Act if it does not, at a minimum, provide full and fair disclosure of the conflict and its impact on the client and obtain informed client consent to the conflict.

This “interpretation” applies a standard under the securities laws to investment advisers that, in ERISA 401(k) fee litigation, some plaintiffs lawyers (and, arguably, some courts) claim should be applied to plan sponsor fiduciaries. (In this regard see our article 401(k) fee litigation update.)

The SEC goes on to state that:

This obligation to provide advice that is suitable and in the best interest applies not just to potential investments, but to all advice the investment adviser provides to clients, including advice about an investment strategy or engaging a sub-adviser and advice about whether to rollover a retirement account so that the investment adviser manages that account.

This extension of the regulation of investment advice to include advice as to retirement plan distributions parallels DOL’s extension of the definition of ERISA “investment advice” (under the now-vacated-in-toto Fiduciary Rule) to include not just recommendations with respect to investments but also recommendations with respect to distributions.

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As we discussed in our prior article, the SEC’s proposal has raised a lot of questions. Many expect the SEC regulatory process to take some time. Nevertheless, with the Fifth Circuit’s decision taking effect on May 7, 2018, it may be that the SEC will be taking the lead in developing new standards of conduct for retirement plan service providers that provide “advice” (however defined) to plan participants.

To repeat what we said at the beginning of this article, these developments are relevant to sponsors because retirement plan fiduciaries have a legal obligation under ERISA to monitor the conduct of plan service providers. Those service providers (e.g., call center operators and education and advice providers) will often be broker-dealers, investment advisers or both. And as the rules applicable to those service providers change, what the plan fiduciary is obligated to monitor also changes.

We will continue to follow this issue.