SEC warns advisers against ‘foreign’ use of ‘fiduciary’

Informal guidance issued by the Securities and Exchange Commission warns investment advisers about their use of the term “fiduciary” on the CRS form, but an industry group says the guidance goes too far.

A March 30 update to the SEC’s “Frequently Asked Questions About the CRS Form” dealing with whether an investment adviser can use the terms “fiduciary” or “fiduciary duty” in their CRS form explains that advisers may use the term, but only to the extent permitted by the instructions of the CRS form and the applicable item.

In the questions and answers, staff reminds companies that the CRS form “is designed to be a short and accessible disclosure for retail investors that helps them compare information about brokerage and/or investment advisory offerings from businesses” and that “the relationship summary is designed to serve as disclosure rather than marketing material.

For some items, the guidance provides that firms must use the prescribed language without modification and, therefore, an investment adviser cannot add the term “fiduciary” to the prescribed language, the SEC notes. For example, the instructions require companies to provide a consistent articulation of their required legal obligations using the statement prescribed in point 3.B. (i) to minimize investor confusion, underline the questions and answers, adding that the instructions do not allow companies to state their required standard of conduct using their own wording.

For items without prescribed language, the SEC staff “warns against an investment adviser using the terms ‘fiduciary’ or ‘fiduciary duty’ when that would be extraneous or unresponsive to the particular item or would imply or suggest exaggerated or unsubstantiated claims, and any use of terms must be accurate and not misleading. »

Embellishment of factual statements about the ability or services of a professional or investment firm with phrases such as “an investment adviser who is bound to a fiduciary standard” is likely inappropriate, according to staff. explains the Q&A.

Similarly, SEC staff cautions against describing fiduciary duty as a “higher standard” or the “highest standard.” Further, it is likely misleading and insensitive for an investment adviser to state that fiduciary duty alone mitigates or eliminates conflicts of interest, says the SEC.

Calls to clarify

Meanwhile, the Institute for the Fiduciary Standard argues that the SEC staff opinion essentially seeks to eliminate the word “fiduciary” from SEC investment adviser disclosure.

“Prior to this March 30 staff notice, mentioning fiduciary status was considered acceptable. Counselors could cite and describe an established fact of law. There was an open door. Now the new 765-word staff opinion is slamming that door,” Knut Rostad, president of the Institute for the Fiduciary Standard, said at a press briefing April 13.

Rostad argues that the staff opinion leaves “no plausible and meaningful way” for an investment adviser to inform investors of their fiduciary status, saying the staff opinion relates to certain phrases, such as “an investment adviser who is held to the fiduciary standard” or a “higher standard” – as inappropriate.

The IFS Chairman further pointed out that, in the context of making the CRS form an information item and not a marketing item, being able to use the word fiduciary appropriately, instead of overstating it, will only than beneficial. Because of the notoriety of the word fiduciary, investors know it’s something they should seek out and let RIAs do, he explained.

Additionally, Rostad suggested that the staff opinion “pokes fun at a centuries-old legal principle infused into the law of 40 [Investment Advisers Act of 1940]and confirmed by the Supreme Court (SEC c. Capital Gains Research Bureau, Inc., et al), and that it seems to seek to eliminate the word fiduciary and rely on the undefined term “best interests”.

Rostad was joined by Stark & ​​Stark attorney and shareholder Jeffrey Lang, who suggested the FAQ should go further by explaining what is proper use or reference to fiduciary terminology. The couple further called on SEC commissioners to override staff advice and clarify how the term fiduciary can be included in the context of prescribed language to avoid being seen as extraneous.

“A suggestion that the adviser is required to adhere to a fiduciary standard is considered inappropriate, whereas this statement may be factually correct. Additional guidance on how to state this language in a compliant manner would be very helpful. Much of the CRS language and format is prescribed,” Lang pointed out.

Bearing recommendations

On March 30, the SEC also issued a staff bulletin providing advice on how broker-dealers, investment advisers and their associates can meet their obligations to retail investors when making account recommendations. , in particular with respect to dual registered or affiliated companies, as well as dual registered companies. licensed financial professionals.

Among the long list of issues discussed, the SEC addresses rollover recommendations, noting that to assess any recommendation to transfer assets out of an employer’s plan or between retirement accounts, the professional must obtain information about the existing plan. , including the costs associated with the options available in the investor’s current plan.

“When making a rollover recommendation to a retail investor, you must have a reasonable basis to believe that both the rollover itself and the recommended account are in the retail investor’s best interest,” advises the bulletin. To that end, he notes that there are specific factors relevant to bearings that should be considered when making a bearing recommendation, including:

  • the costs and level of services available;
  • existing account features, including costs;
  • the investment options available;
  • ability to make withdrawals without penalty;
  • application of required minimum distributions;
  • protection against creditors and legal judgments; and
  • ownership of employer shares.

In addition to Reg BI and the IA fiduciary standard, the bulletin reminds finance professionals that if they plan to rely on Prohibited Transaction Exemption 2020-02 (PTE 2020-02), they should review Ministry of Labor guidelines on factors to consider. in formulating a turnover recommendation, as well as the relevant documentation requirements.

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