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SEC Investment Adviser and Relationship Summary guidance

In our last article we discussed the Securities and Exchange Commission’s new broker-dealer standard of conduct rule and how it may change how broker-affiliated plan service providers (e.g., call center operators) interact with plan participants. The new broker rule makes significant changes to the SEC mandated standard of conduct under which brokers must operate and is clearly the most significant part of the SEC’s new guidance package.

In this article, we briefly note the other guidance the SEC published in connection with the broker rule – an “Interpretation Regarding Standard of Conduct for Investment Advisers” and a new requirement that brokers and investment advisers provide retail investors a “Relationship Summary.”

Investment Adviser standard of conduct 

As part of the broker rule package the SEC published guidance reiterating (and in some cases clarifying) its interpretation of the fiduciary duty that a registered Investment Adviser (RIA) owes its clients.

The RIA’s “fiduciary” duty is for the most part similar to the standard of care a broker owes a retail customer (as we discussed in detail in our first article). Two significant differences: Brokers typically have a transaction-based relationship with a retail customer (with, perhaps, some negotiated ongoing duties); RIAs will generally have an ongoing relationship with their clients. And, while brokers have an affirmative duty to mitigate any conflicts that “create an incentive for a natural person [affiliated with the broker] to place the interest of the broker … or such natural person ahead of the interest of the retail customer,” RIAs do not – rather, the RIA’s duty to mitigate a conflict of interest, rather than simply relying on disclosure, is generally a function of the facts and circumstances.

Relationship Summary

The new Relationship Summary rule requires brokers and RIAs to provide retail investors, at the beginning of a relationship with the firm, a “plain English” summary of “(i) the types of client and customer relationships and services the firm offers; (ii) the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm.”

In explaining the interaction between the Relationship Summary and broker’s Disclosure Obligation under the new broker rule, the SEC stated:

As a general matter, the Relationship Summary reflects an initial layer of disclosure, with the Disclosure Obligation reflecting more specific and additional, detailed layers of disclosure. We believe the Relationship Summary and the Disclosure Obligation, while separate obligations with significant individual value, will complement each other and, consistent with our layered approach to disclosure, are designed to build upon each other to provide different levels of key information and may be required to be delivered at different times.

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We will continue to follow the issues for plan sponsors and sponsor fiduciaries raised by the new SEC guidance.

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