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Investment Services Regulatory Update - June 2019

New Rules, Proposed Rules, Guidance and Alerts


SEC Adopts Rules and Interpretations Concerning the Standard of Conduct for Broker-Dealers and Investment Advisers

On June 5, 2019, the SEC adopted a package of rules and interpretations addressing standards of conduct for broker- dealers and investment advisers:

  • Regulation Best Interest. Regulation BI establishes a standard of conduct for broker-dealers when making an investment recommendation to a “retail customer” involving securities. Regulation BI includes specific obligations concerning disclosure, standard of care, conflicts of interest and compliance, requiring a broker- dealer to:

    1. act in the of its at the a is own of its

    2. address conflicts of interest by establishing policies and procedures to identify and disclose, and in certain circumstances mitigate or eliminate, conflicts of interest.

  • Form CRS Relationship Summary. Investment advisers and broker-dealers will be required to deliver a “relationship summary” to retail investors at the beginning of a client relationship. The form would describe the services offered to retail investors, the standard of conduct applicable to those services, fees and costs, conflicts   of interest, the firm’s disciplinary history and how to obtain additional information.

  • SEC Interpretation Regarding Standard of Conduct for Investment Advisers. The SEC issued an interpretive release regarding an investment adviser’s fiduciary duty under the Investment Advisers Act of 1940. Among other things, the interpretation discusses an adviser’s obligation to act in the best interest of its client at all times and how an adviser fulfills this duty. The interpretive release was not intended to create any new legal obligations for advisers.

  • “Solely Incidental” Interpretation. Finally, the SEC issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion from the definition of “investment adviser” under the Advisers Act.

Regulation BI and Form CRS will become effective 60 days after publication in the Federal Register and will include a transition period until June 30, 2020, when firms must come into compliance. The SEC’s interpretive positions are effective upon publication in the Federal Register.

Vedder Price is preparing a detailed summary of these new rules and interpretations that will be published under separate cover.

The SEC’s adopting and interpretive releases are available as follows:


First, the proposal would streamline applicable significance tests under Regulation S-X to more closely align with significance  tests under the Investment Company Act of 1940. Proposed Rule 1-02(w)(2) of Regulation S-X would create a separate definition of “significant subsidiary” for investment companies using a modified version of the investment test and income test set forth in Rule 8b-2 under the Investment Company Act, as follows:

  • Investment Test. An acquisition would be significant if the value of a fund’s investment in and advances to the tested subsidiary (i.e., the acquired fund) exceed 10% of the value of the fund’s total investments as of the end of the most recently completed fiscal year.

  • Income Test. An acquisition would be significant if the total investment income of the tested subsidiary as of the most recently completed pre-acquisition fiscal year exceeds 10% of the total investment income of the acquiring fund. The income test includes (1) investment income, such as dividends; (2) net realized gains and losses; and (3) net change in unrealized gains and losses.

In addition, a tested subsidiary would be deemed significant if the income test yields a condition of greater than either (1) 80% by itself, or (2) 10% and the investment test yields a result of greater than 5%.

The proposal also would address required financial statements of acquiring and acquired investment funds, including registered investment companies and private funds relying on Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Proposed Rule 6-11 of Regulation S-X would apply a facts and circumstances evaluation to determine whether  a fund acquisition has occurred and, if so, would require only one year of audited financial statements. Financial statements of an acquired fund would need to be provided only if the investment and income significance tests above exceed 20%.  For acquisitions of private funds, the financial statements may be prepared in accordance with U.S.  GAAP.

Additionally, the proposal would eliminate the requirement for investment companies to provide pro forma financial statements in connection with business combination transactions, and instead require investment companies to provide certain supplemental information about the combined fund post-acquisition, including, among other things,  (1) a pro forma fee table; (2) a schedule of the acquired fund’s investments and a related narrative discussion if there will be material changes to the acquired fund’s investment portfolio resulting from applicable investment restrictions; and (3) narrative disclosure about material differences between the accounting policies of the combined fund and   those of the acquired fund.

Finally, the proposal would make certain conforming changes to Form N-14 to align the form with the new rules and amendments discussed above.

The SEC is seeking comments on the proposal on or before July 29, 2019. The full text of the proposal can be found here


SEC, NASAA and FINRA Issue Senior Safe Act Fact Sheet

On May 23, 2019, in recognition of the one-year anniversary of the passage of the Senior Safe Act, the SEC, the North American Securities Administrators Association and FINRA issued a fact sheet to raise awareness of the act and its immunity provisions for covered financial institutions in an effort to encourage firms to train their employees on how to detect and report suspected senior financial exploitation. The Senior Safe Act provides immunity to certain financial institutions, including broker-dealers, investment advisers and transfer agents, and their eligible employees from   liability in any civil or administrative proceeding for reporting potential exploitation of a senior citizen. The fact sheet provides general information about the  Senior Safe Act, including information about the  employee training required   for immunity and related recordkeeping requirements, among other things.

The fact sheet is available here.

Public Statements, Press Releases and Testimony

Remarks of SEC Commissioner Hester M. Peirce at the ETFs Global Markets Roundtable

In her remarks at the ETFs Global Markets Roundtable on May 21,  2019,  SEC  Commissioner  Hester  Peirce commented on the role ETFs play in financial experimentation and innovation, and the SEC’s role in protecting   investors while not unnecessarily slowing ETF innovation. She discussed the SEC’s proposed ETF rule, which would standardize the conditions for ETF exemptive relief, thereby providing a level playing field for ETF sponsors and    making it easier for new ETF sponsors to come to market.

Ms.  Peirce  also discussed the  SEC’s cautious approach in  issuing exemptive orders for  actively managed ETFs   and approving new types of ETFs. She noted the growth of actively managed ETFs and the SEC’s recently issued exemptive order for a non-fully transparent actively managed ETF, and expressed a desire that the SEC would act expeditiously on other outstanding requests for similar exemptive relief. She stated her views that the SEC’s concerns about investor comprehension of leveraged and inverse ETFs could be addressed by disclosure and that the SEC’s refusal to permit additional ETF sponsors to offer such products creates an oligopoly for the two ETF sponsors that previously received exemptive relief to the detriment of investors.

Ms. Peirce  further discussed the  continued interest in  an  exchange-traded cryptocurrency product.  She  noted that the SEC had disapproved certain product proposals in light of several stated concerns, but stated that that approving such a product could lead to increased participation by institutional investors in cryptocurrency markets that could    lead to better defenses against theft, improved custody solutions and lower risk of market manipulation.

The transcript of Ms. Peirce’s remarks is available at: https://www.sec.gov/news/speech/speech-peirce-052119

© 2022 Vedder PriceNational Law Review, Volume IX, Number 184

About this Author

Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...