August 4, 2022

SEC Staff Reminds Firms of Fiduciary Obligations

Philip Heimowitz Commentary by Philip Heimowitz

SEC staff reminded broker-dealers and investment advisers of the obligation under Regulation Best Interest ("Reg BI") and the IAA fiduciary standard to act in a retail investor's best interest and disclose conflicts of interest.

In an FAQ-style bulletin, SEC staff issued guidance for broker-dealers and advisers to help comply with the obligation to provide advice and recommendations in the best interest of retail investors. The staff noted that an investment adviser's fiduciary duty applies equally to all advisory clients - whether they are investors or otherwise. The staff emphasized that monitoring conflicts of interest is not a "'check-the-box' exercise," but rather an ongoing process that requires constant supervision. The staff encouraged firms to review the bulletin in conjunction with Reg BI and the IAA fiduciary standard.

The bulletin covered a wide variety of topics pertaining to best interest and conflicts of interest, including:

  • providing a clear definition and examples of conflicts of interest for broker-dealers, investment advisers and financial professionals;
  • highlighting sources of conflicts of interest arising from:
    • compensation or other benefits to the firm;
    • compensation to financial professionals based on quotas, sales contests or products sold; and
    • gifts and entertainment provided to the firm's professionals;
  • outlining obligations under Reg BI and the IAA fiduciary standard for firms to identify potential conflicts of interest, as well as examples of steps firms can take to identify those conflicts;
  • outlining obligations beyond disclosing conflicts of interest to clients, such as addressing conflicts through mitigation or removing the conflict entirely;
  • addressing circumstances where eliminating a conflict of interest may be required, or a determination made, to refrain from providing advice or recommendations that are influenced by the conflict;
  • identifying relevant factors for mitigating conflicts of interest;
  • providing examples of conflicts of interest that require monitoring, such as compensation arrangements and examples of potential conflict mitigation;
  • reviewing a list of the products offered by a firm for potential conflicts of interest;
  • addressing how to satisfy conflicts of interest disclosure obligations;
  • outlining disclosure requirements regarding advice or recommendations involving proprietary products; and
  • reviewing how to monitor conflicts over time and periodically assess the adequacy and effectiveness of their policies and procedures.

Commentary

Can we stop worrying after policies and procedures designed to identify and address conflicts of interest have been established? No. The Staff has stated that policies and procedure are not "set it and forget it" endeavors. Having a process in place to address new compliance risks is critical to the effectiveness of a compliance program.

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