Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



Does the SEC Expect Investment Advisers to Make a Sweeping Compliance Upgrade?

Does the SEC Expect Investment Advisers to Make a Sweeping Compliance Upgrade?

Is the SEC’s Interpretation of Regulation BI for Investment Advisers a Clarification?

Or an Order for a Firm-wide Compliance Upgrade?

By Lauri London

The SEC ‘s Final Interpretation Regarding Standard of Conduct for Investment Advisers (the “Interpretation”)  “clarifies” the fiduciary duty of Investment Advisers in a succinct 42 pages.    The Commission states that the Interpretation should affirm an IA’s understanding of fiduciary duty, reduce uncertainty and facilitate compliance.  However, the Interpretation’s lengthy discussion will likely raise many new questions for advisers as they assess their own compliance with the new Regulation BI.    

According to the Interpretation, an investment adviser’s fiduciary duty is principles-based and applies to the entire relationship between the adviser and its client.  The fiduciary duty follows the contours of the relationship between the adviser and its client, who may shape that relationship by agreement, provided that there is full and fair disclosure and informed consent.  Although the SEC provides guidance and numerous footnotes and references, the Interpretation allows each adviser to apply their own judgment as to their own compliance.  It will be interesting to see examinations and/or enforcement in the future with respect to advisers’ Reg BI compliance, as much of the Interpretation’s guidance is amorphously described or defined  as “within the scope of the relationship.”

As examples of “following the contours”, the Interpretation provides examples of the varying scopes of adviser relationships, from the one-time financial plan, to ongoing discretionary management and notes the varying duties defined by the relationship and the client’s sophisticationNote that the Interpretation includes discussion of institutional clients, stating that the level of fiduciary duty for an institutional or more sophisticated investor may be different than that for an individual investor.  Though REG BI may not apply to internal Pension Fiduciaries, it will apply to IAs handling 401(k) rollovers, not just with respect to investment advice, but also with respect to the advice to roll over the 401(k).  

According to the Interpretation, the fiduciary duty is comprised of the Duty of Care and the Duty of Loyalty

The Duty of Care breaks down further into:

·         The Duty to Provide Advice that is in the Best Interest of the Client,

o   The Interpretation’s discussion of the Duty to Provide Advice that is in the Best Interest of the Client is 6 pages long.  It includes the suitability requirement but goes further to require a “Reasonable Inquiry into Client’s Objectives,”  and a “Reasonable Belief that advice is in the Best Interest of the Client.”  Numerous considerations for each are listed, such as a client’s investment experience, financial goals, current income, assets and liabilities and marital status including an obligation to update the client’s investment profile in order to maintain an understanding and adjust the advice to reflect any changed circumstances.    How often should an adviser attempt to update a client’s profile?  The Interpretation doesn’t offer guidance other than it “would…turn on the facts and circumstances…”

·         The Duty to Seek Best Execution, (nothing new) and

·         The Duty to Provide Advice and Monitoring over the Course of the Relationship

o   The Interpretation provides little explanation of the Duty to Provide Advice and Monitoring other than it would be defined by the scope of the relationship, leaving it up to each adviser to determine what advice and how much monitoring is appropriate.  No guidelines are provided at all, such as providing a recommended frequency for monitoring (i.e., quarterly) with a discretionary relationship involving continuous management and supervision. 

According to the Interpretation, the Duty of Loyalty breaks down further into

·         Full and Fair disclosure of conflicts,

o   In the case of disclosure of conflicts, the Interpretation provides examples of a (1) dual registrant, who must disclose (a) in what capacity it is providing services and how the client is charged for such services, and (b) limitation on investment choices imposed by the broker-dealer affiliate.  The other example used (2) relates to allocating investments with self- interest such as favoring accounts that pay higher or performance-based fees.

·         Adviser must put client’s interests first, and

o   Meaning that an adviser will not  subordinate clients’ interests to its own – which applies to ALL advice, not just security selection. 

·         Full and Fair Disclosures need to be specific and clear and provide the ability for the client to make an informed decision.

o   The Interpretation notes that disclosure alone does not necessarily fulfill an adviser’s duty to act in its clients’ best interests.  Further, the Interpretation states, in the situation where full and fair disclosure is not possible, an adviser must eliminate or mitigate – (modify practices to reduce) the conflict but no examples or explanations are included. 

o   To illustrate what is full and fair disclosure, the Interpretation provides some guidance on specificity – and reiterates prior guidance on the use of the word “may”.   Finally, the Interpretation states that whether disclosure is “full and fair” will depend on the nature of client, scope of services and the material fact or conflict. 

The Interpretation reminds us that not only is full and fair disclosure part of an IA’s duty of loyalty, it is required on the Company’s Form ADV, Part 2A, and will be required on the relationship summary (Form CRS), which would include a “plain English” summary of certain of the firm’s conflicts of interest. 

Despite the SEC’s assertion that the Interpretation clarifies an investment adviser’s fiduciary duty, and that the Interpretation affirms what investment advisers already know, the Interpretation should encourage advisers to review their policies and procedures with respect to client relationships and portfolio management from “cradle to grave.”  The language in the Interpretation provides for each adviser to make its own judgments.  The Interpretation provides guidelines (and requires IAs create some of their own guidelines) that require a careful review of client onboarding documents, suitability determinations, investment management agreements, and policies and procedures pertaining to account monitoring, communications with  clients and books and records.   

The Interpretation can viewed at

Lauri B. London is counsel at Cohen & Buckmann and counsels investment advisers on legal matters including regulation and compliance.