SEC issues FAQs on investment advice rule

The Securities and Exchange Commission published answers Tuesday to frequently asked questions about its investment advice rule that takes effect next year.

The FAQs pertained to one section of the four-part investment advice rule known as Form CRS, a new disclosure meant to help retail investors understand a firm’s services, fees, conflicts of interest and disciplinary history. Broker-dealers and registered investment advisers must file the form with the SEC between May 1 and June 30 next year.

The FAQs contained four questions and answers related to format and delivery requirements.

Most significantly, they stipulate that RIAs and brokerage firms should only submit one disclosure form instead of separate disclosures for each separate service they provide.

For example, if a broker-dealer offers a range of services, such as self-directed, full-service and employer-sponsored retirement plan service options, the SEC requires the firm to prepare one summary describing all the different services, according to the FAQs.

“I think they gave the response that was expected,” said Kevin Walsh, a principal at Groom Law Group. “The important thing is, they’re telling you that you should only have one disclosure for all of your functions as a broker or as an RIA.”

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The SEC’s Division of Investment Management and Division of Trading and Markets, which issued the FAQs, seem to make an exception for firms dually registered as a broker-dealer and RIA, allowing such firms to file two separate disclosures, one for each function.

If a dually registered firm wants to file one summary, it “must summarize all of the principal brokerage and investment advisory relationships and services” offered to retail investors, according to the document.

The SEC approved its investment advice reform package June 5 in a 3-1 vote. The main part of the rule is Regulation Best Interest, which requires brokers make investment recommendations that are in clients’ best interests, as opposed to recommendations that are just “suitable,” which is the current standard.

Proponents argue Reg BI sets an appropriate standard for brokers, while opponents such as consumer advocacy groups say the standard is similar to the current suitability standard and not tough enough.

The SEC issued the rule in response to pressure from the Labor Department’s fiduciary rule governing investment-advice in retirement accounts, which was issued in 2016. That rule, which took effect in 2017 and subjected brokers to a fiduciary standard when dealing with accounts like 401(k)s and IRAs, was overturned by an appeals court last year.

The Financial Industry Regulatory Authority Inc., which regulates broker-dealers and their registered brokers, issued a checklist last month for firms complying with Regulation Best Interest.

The SEC’s remaining FAQs touch on relatively minor subjects, Mr. Walsh said.

For example, one stipulates that firms can send the disclosures to clients in a separate mailing or in a “bulk” delivery with other required disclosures. If delivered in paper format, firms must make sure Form CRS is “the first among any documents that are delivered at that time,” and if delivered electronically must present it “prominently in the electronic medium, for example, as a direct link or in the body of an email or message, and must be easily accessible for retail investors.”

The other FAQs outline how firms can create Form CRS in a machine-readable format and say that investment advisers to pooled investment vehicles like hedge funds, private equity funds and venture capital funds don’t have to file the disclosure.

“To me, it seems like the SEC was trying to answer some of the easy questions before the holidays,” Mr. Walsh said. “I don’t think any of these jump out at me as landmark.”

The SEC said it expects to update the FAQs with responses to additional questions.

Related Topics: Securities and Exchange Commission