10 Things

10 Things...Boards should ask about SEC conflict rules

April 20, 2018

By FBV staff

The Securities and Exchange Commission this week proposed a package of rulemakings and interpretations designed to address broker-dealers' and investment advisers' conflicts of interest with regard to dispensing investment advice. Regulation Best Interest would cover all types of investor accounts rather than just the retirement savings accounts covered by the Department of Labor's fiduciary rule, which was overturned by a federal appeals court last month. It is subject to a 90-day comment period and therefore is likely to be revised before being finalized, but it could eventually replace the DOL rule. The SEC addressed what it called "investor confusion about the nature of their relationships with investment professionals" by introducing a new short-form disclosure document, Form CRS, and also proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors. 


The rule package is comprehensive and, like much that comes out of the SEC, needs to be digested and analyzed by the industry over time. But we asked a panel of fund lawyers to give us their initial thoughts on how independent fund directors might start looking at this initiative and what types of questions they could start asking the advisers with which they work to get conversations started. 


  1. Are our fund shares sold more by brokers than by advisers?
  2. Do the brokers and advisers use the same or different share classes for their customers?
  3. How will suitability standards change distribution patterns?
  4. If there are multiple share classes, are investors eligible for more than one type, and does it matter how their intermediary is regulated or just how much their investment is?
  5. Does the adviser vary its contribution to distribution depending on what type of intermediary it is working with? If so, is the variation justifiable? And are such variations made clear in the fund’s disclosure documents?
  6. Will this drive brokers to sell more passive than active? If so, boards overseeing funds managed actively should understand how the adviser will combat that tendency.
  7. Does the combination of a best interest standard—which is based in large part upon the fiduciary standard applicable to advisers and could impose on advisers certain net capital and licensing requirements similar to those currently applicable to broker-dealers—start to blur the line between broker-dealers and investment advisers? How does this affect the compliance infrastructure in a firm that has a broker-dealer and one or more investment advisers, and does that divert compliance attention to other matters?
  8. As noted by some of the Commissioners, many investment advisers follow industry standards when evaluating their compliance with their existing fiduciary duties. Some established industry standards, however, are the result of settled enforcement matters, rather than based in existing law or regulation. Investment advisers need to be thoughtful about whether some of the SEC’s proposed interpretations are supported by regulation, and boards need to be evaluating how the new guidance might affect the obligations—and the time commitments—of the adviser’s CCO.
  9. Regulation BI and Form CRS each will require certain disclosures to retail clients. Form CRS is designed as a high-level summary, but Regulation BI will require certain written disclosures of the scope and terms of the relationship. The two may need to be better integrated to limit the amount of new disclosure required to be provided to retail investors, and directors should be asking questions about the information (if any) that might be directed to retail fund investors as a result of the new regulations. Can it help them better understand the fund and the services provided by service providers to the fund?
  10. How will guidance on fiduciary standards likely play into excessive fee litigation?


We welcome your ideas for topics and participation in creating future lists of 10 Things. Please contact Hillary Jackson at hillary.jackson@fundboardviews.com.



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