On both sides of the border, securities regulators have been working for several years to amend and clarify the obligations that broker-dealers and investment advisers owe to retail investors. In both countries, the regulators considered adoption of an over-arching, best interest standard.
As we reported in June 2018, the Canadian Securities Administrators (CSA) decided not to adopt such a standard. Instead, they proposed specific amendments (Client-Focused Reforms) to the know-your-client (KYC), suitability, conflicts of interest and relationship disclosure information (RDI) requirements in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), as well as a new know-your-product (KYP) requirement.
The U.S. Securities and Exchange Commission (SEC) took the opposite approach by adopting, on June 5, 2019, Regulation Best Interest: The Broker-Dealer Standard of Conduct (Reg BI). Both approaches have their supporters and critics, and we think that Canadian market participants might find the US approach interesting, albeit of indirect relevance. In particular, the statements issued by individual SEC Commissioners and the SEC’s Investor Advocate at the June 5 public hearing to consider Reg BI are worth reading because they contextualize the reforms and highlight some of the concerns about the final rules. We expect that CSA members will pay attention to Reg BI, how the SEC addressed the comments on its original proposal, and how Reg BI is implemented (and criticized) as the Client-Focused Reforms are finalized.
In addition to adopting Reg BI, the SEC adopted:
- Form CRS - Relationship Summary, which will require broker-dealers and investment advisers to provide retail investors with a short relationship summary document covering the relationships and services the firm offers, the fees, costs, conflicts of interest and required standard of conduct associated with those relationships and services, and whether the firm and its financial professionals have reportable legal or disciplinary history;
- An interpretation of the fiduciary duty that investment advisers owe to their clients under the Investment Advisers Act of 1940 (Advisers Act); and
- An interpretation of the “solely incidental” prong of the broker-dealer exclusion from the requirement to register under the Advisers Act.
As we mentioned above, the CSA’s to-do list for 2019-22 includes adoption of the Client-Focused Reforms (or an amended version of them). We will continue to monitor this initiative and keep you informed.