Investment advisers are free to describe themselves as fiduciaries and to market that standard of care to clients, despite a prohibition on the term in one part of a new Securities and Exchange Commission disclosure form.
In its recently approved
advice reform package, the SEC released a final rule for the client relationship summary,
known as Form CRS. The two-page document, which must be presented to clients, is meant to explain the differences between broker-dealers, investment advisers and dual registrants.
On page 27 of the 524-page rule, there's a reference to the SEC's attempt to clarify the standard of conduct investors should expect from financial professionals.
"For example, we are substantially revising our approach to disclosing standard of conduct and conflicts of interest to make this information clearer to retail investors, including (among other changes) eliminating the word 'fiduciary' and requiring firms — whether broker-dealers, investment advisers, or dual registrants — to use the term 'best interest' to describe their applicable standard of conduct," the Form CRS rule states.
When this language was pointed out earlier this week in a tweet by Skip Schweiss, head of advisory advocacy and industry affairs at TD Ameritrade Institutional, it caused a stir in the adviser community.
But advisers are still allowed to use the term, according to the agency.
"Investment advisers are fiduciaries, recognized and regulated as such by the commission," an SEC spokeswoman said in a statement. "Recent commission action does not prohibit investment advisers from calling themselves fiduciaries."
In fact, the SEC prohibition on "fiduciary" only applies to the standard-of-conduct description in Form CRS, not to the rest of that document, according to Karen Barr, president and CEO of the Investment Adviser Association.
"We have confirmed with SEC staff that advisers can use the term 'fiduciary' elsewhere on Form CRS," Ms. Barr said in an interview. "Investment advisers are still fiduciaries, full stop. They should emphasize their fiduciary duty and put their clients first, the way they always have. No one should stop doing what they're doing based on all the noise out there."
Advisers will still be able to tout their fiduciary status, according to G.J. King, president of RIA in a Box, a compliance, software and consulting firm.
Form CRS "is unlikely to have an impact on how RIAs more broadly market and position themselves," Mr. King said.
In a follow-up tweet, Mr. Schweiss clarified the mandated "best interest" language for advisers narrowly applied to describing their standard of care in Form CRS. A TD Ameritrade spokesman declined to comment, saying the firm was continuing to study the nearly 1,400-page SEC advice reform rule package.
Under the new SEC advice regulations, brokers and advisers will continue to be regulated separately. Brokers will be governed by
Regulation Best Interest, which replaces the current suitability standard, while advisers will adhere to fiduciary duty.
Form CRS is designed to guide investors in obtaining information about fees, scope of services and other characteristics of advice business models.
"The
conversation-starter questions embedded throughout Form CRS will provide RIA firms with a more natural opportunity than they have today to discuss their fiduciary obligations clients," Mr. King said. "It opens the door for an RIA firm to have a much more robust conversation around their fiduciary responsibility."
Financial professionals will have to file their first Form CRS with the SEC in June 2020. For advisers, that will mean coming up with a shorter version of some of the same material contained in Form ADV.
"It will be a challenge to explain what you're doing in two pages in plain English," Ms. Barr said.
