SEC

George Michael Gerstein on podcast to discuss fiduciary-related regulatory developments

SEC Updates Form CRS FAQs

On February 11, 2020, the staff of the Securities and Exchange Commission (SEC) updated its Frequently Asked Questions on Form CRS with regard to a number of topics:

Legal Representative:  Similar to the update on Regulation Best Interest, the staff clarified that the term “legal representative” would not cover regulated financial services industry professionals including a workplace retirement plan representative (e.g., plan sponsor, trustee, other fiduciary), except in limited circumstances.  The staff further noted, however, that a formerly regulated financial services industry professional who is not currently regulated, would be considered a “non-professional” and, thus, a covered legal representative.

Delivery requirements: The staff clarified that where one adviser (Firm A) provides advice to another unaffiliated adviser (Firm B) but has no advisory contract (oral or written) with Firm B’s clients, absent other facts or circumstances that would indicate that Firm A provides investment advisory services to Firm B’s retail investor clients, Firm A would not be required to deliver a Form CRS to Firm B’s retail investor clients. The staff also indicated that an amendment to an existing account agreement solely to add another account holder or beneficiary would not trigger a Form CRS delivery requirement but that converting an account at a dual registrant from a brokerage account to advisory account (and presumably vice versa) would require delivery of Form CRS even if the investor initially received Form CRS upon opening the original account. The staff also clarified that a broker-dealer acting solely as a qualified custodian to an investment adviser’s retail investment advisory clients would not need to deliver a Form CRS. Finally, the staff discussed when a state-registered adviser transitioning to SEC registration is required to deliver its Form CRS.

Affiliates: The staff clarified that affiliated investment advisers (or affiliated broker-dealers) may create and deliver a combined Form CRS. The staff also indicated that a firm with multiple affiliates can combine disclosure in one Form CRS, but the staff cautioned that the page limits still apply and that the firm “should be mindful of the potential that additional information from multiple affiliates could “obscure or impede understanding.”  It also should be mindful that it is required “to present brokerage and investment advisory information with equal prominence and in a manner that clearly distinguishes and facilitates comparison.”

Sub-advisers: The staff stated that in circumstances where an adviser replaces a sub-adviser, and there are no changes to the advisory agreement, services, investments, or conflicts of interest that would make the information in the adviser’s Form CRS materially inaccurate, the staff would not object if the firm does not consider this a material change that would require the adviser to amend its Form CRS. The staff did not clarify the types of changes to the advisory agreement, services, investments or conflicts that would be considered material changes.

Disciplinary history: The staff clarified that a firm that reports disciplinary history related to its parent company in response to Item 11 on the firm’s Form ADV and Items 11A-K on the firm’s Form BD must answer “yes” to Item 4 in Form CRS.

Foreign language: Finally, the staff stated that it would not object to the delivery of a complete translation of Form CRS in a foreign language so long as the firm also delivers a separate English Form CRS at the same time.

SEC Updates Regulation Best Interest FAQs – Our Initial Take

On February 11, 2020, the staff of the Securities and Exchange Commission (SEC) updated its Frequently Asked Questions on Regulation Best Interest.  The update added a new “Retail Customer” section with four new Q&As.

  • The first Q&A reminds firms to carefully consider the extent to which associated persons can make recommendations to prospective retail customers in compliance with Regulation Best Interest, should the prospective retail customer use the recommendation.
  • The second Q&A clarifies that Regulation Best Interest applies to recommendations by a limited purpose broker-dealer of private offerings to accredited investors that are retail customers, and that the application of Regulation Best Interest is not dependent on whether the broker-dealer engages in limited activity.
  • The third Q&A seeks to clarify that the term “legal representative” of a retail customer would not cover regulated financial services industry professionals, which include registered investment advisers and broker-dealers, corporate fiduciaries and insurance companies, and the employees or other regulated representatives of such entities.
  • The final Q&A states that a retail customer, or a non-professional legal representative of such retail customer, cannot waive or agree to waive the protections afforded under Regulation Best Interest.

The update also adds a new Q&A in the Recommendations section that a recommendation of a securities account (e.g., a self-directed brokerage account) is covered by Regulation Best Interest even if the broker-dealer does not intend to provide subsequent recommendations subject to Regulation Best Interest in the new account.

Finally, the update added a new Q&A in the Disclosure section that confirms that while a standalone broker-dealer will generally be able to satisfy the requirement to disclose, in writing, all material facts about the scope and terms of its relationship with the retail customer, by delivering the relationship summary, a dually registered, broker-dealer or its associated persons, will not be able to satisfy the requirement with the relationship summary alone but must also disclose the capacity in which they are acting with respect to the retail customer.

Proposed Amendments to Issuer Disclosure: To ESG or Not to ESG

Proposed Amendments to Issuer Disclosure: to ESG or not to ESG

In connection with the SEC’s January 30 proposed amendments to certain of the financial disclosure requirements applicable to public companies under Regulation S-K, as well as accompanying guidance thereon, the separate public statements of Chairman Jay Clayton, Commissioner Hester Peirce, and Commissioner Allison Herren Lee underscore the continuing divide over the role of the SEC in disclosure related to ESG factors–and particularly climate-related disclosure–and its materiality to investors.

John P. Hamilton

Commissioner Peirce applauds the proposed amendments and guidance for “not bow[ing] to demands for a new [ESG-related] disclosure framework, but instead support[ing] the principles-based approach that has served us well for decades.” Citing the lack of sustainability-focused metrics disclosed in a recent sample of public disclosure filings, Peirce suggests that, “[t]here is reason to question the materiality of ESG and sustainability disclosure based on existing practices.” Further, Peirce highlights her skepticism of “calls to expand our disclosure framework to require ESG and sustainability disclosures regardless of materiality.”

Commissioner Lee, on the other hand, notes that she cannot support the proposal because the Commission has chosen to “ignore the challenge of disclosure around climate change risk rather than to begin the difficult process of confronting it.” Lee posits that investors have “overwhelmingly” made clear to the SEC, “through comment letters and petitions for rulemaking, that they need consistent, reliable, and comparable disclosures of the risks and opportunities related to sustainability measures, particularly climate risk …[and] that this information is material to their decision-making process, and a growing body of research confirms that.”  In Lee’s view, the “principles-based ‘materiality’ standard has not produced sufficient disclosure to ensure that investors are getting the information they need—that is, disclosures that are consistent, reliable, and comparable.”

Chairman Clayton, in his comments, took the opportunity to summarize steps that the SEC has taken over the last several years involving climate-related disclosure, framing the SEC’s commitment as “rooted in materiality,” and citing efforts such as the Commission’s 2010 guidance on climate change disclosure, as well as continuing engagement, both formally and informally, with market participants and non-U.S. regulators. In addition, Chairman Clayton noted certain of the challenges involved, including the “complex, uncertain, multi-national/jurisdictional and dynamic” landscape as well as the forward-looking nature of much of such disclosure, which “likely involve[s] estimates and assumptions regarding, again, complex and uncertain matters that are both issuer- and industry-specific…”

Looking ahead, Chairman Clayton highlighted two “avenues of engagement that currently are of particular interest” to him:

  1. Discussing with issuers, such as property and casualty insurers, the extent to which they use, and their experience with, environmental and climate-related models and metrics in their operations and planning, including price, risk and capital allocation decisions; and,
  2. Discussing with asset managers that have been using environmental and climate-related models and metrics to allocate capital on an industry or issuer specific basis their experience with that process.  

 De Facto Materiality – A Proposal in the ESG Disclosure Simplification Act

While several ESG-related bills have been filtering through Congress, and each will likely continue to face an uphill battle, one such bill, the ESG Disclosure Simplification Act of 2019 would address the materiality question raised in the Commissioners’ public comments referenced above by deeming ESG metrics “de facto material.” As such, the draft law would task public companies with mandatory reporting, while the SEC would be responsible for defining the relevant ESG metrics based on recommendations from the permanent Sustainable Finance Advisory Committee to be established pursuant to the law.

Upcoming Webcast – The SEC’s Proposed Amendments to the Advisers Act Advertising Rule

Please join Fiduciary Governance Group’s Larry Stadulis and Sara Crovitz, along with Les Abromovitz from Foreside, and Mary Beth Constantino from Fidelity Investments, for a one hour webinar to discuss the SEC’s recent proposed amendments to the Investment Advisers Act of 1940 Advertising Rule.

Thursday, February 13, 2020
1:00 PM – 2:00 PM EST

Discussion Topics:
• The Advertising Rule in Its Current Form
• Proposed Amendments
• Difficulties with the Proposals
• Possible Solutions

Register for the webinar here.