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SEC Division of Investment Management Director Dalia Blass Discusses Standard of Conduct Rulemaking Proposals and Liquidity Risk Management at PLI Investment Management Institute

In her remarks at the PLI Investment Management Institute 2018 in New York on April 30, 2018, SEC Division of Investment Management (IM) Director Dalia Blass discussed two IM regulatory priorities that have been the subject of recent rulemaking developments—standards of conduct for investment professionals and liquidity risk management—and emphasized that the SEC is striving “to be a responsive regulator that seeks engagement from all.”

Standards of Conduct for Investment Professionals

Director Blass explained that one of the primary objectives of the standards of conduct proposals is to provide clarity to retail investors about the different types of investment professionals, how they differ, and why it matters. To that end, Director Blass asserted that the proposed “Relationship Summary” disclosure document would be an instructive tool for investors by highlighting key differences between broker-dealers and investment advisers, including as to “(1) the principal types of services offered, (2) the legal standards of conduct that apply to each, (3) the fees the customer would pay, and (4) certain conflicts of interest that may exist.” Echoing her introductory point of emphasis, Director Blass asked for public comment as to any “room for improvement” with the Relationship Summary proposal and solicited input from “Main Street investors...consumer groups...financial professionals...experts in financial literacy, information design, and marketing,” among others.

On the proposed Regulation Best Interest (Reg. BI)—which would create a duty under the Securities Exchange  Act of 1934 for a broker-dealer to act in the best interest of its retail customer, without putting the broker-dealer’s interest ahead of those of the customer—Director Blass noted that the proposal seeks “to preserve the pay-as-you-go broker-dealer model by recognizing how it differs from the investment adviser model.” Acknowledging a criticism of the proposal, that it does not define the term “best interest,” Director Blass said “we have defined the contours of the obligation: a broker-dealer cannot put its interests ahead of the retail customer’s and must comply with specific disclosure, care and conflict of interest obligations,” adding that “[a]s advisers know, a principles-based standard can serve Main Street investors well.”

Director Blass also discussed how Reg. BI compares to existing standards. As to existing suitability standards for broker-dealers under FINRA rules, Blass stated that “Reg. BI incorporates, but goes beyond suitability, in that it covers disclosure, care, and conflict obligations.” Blass contended that the foregoing obligations “are key enhancements that cannot be satisfied by disclosure alone, that place greater emphasis on the importance of costs and financial incentives, and that could be directly enforced by the Commission.” Contrasting Reg. BI to existing advice standards, Director Blass noted that “[t]he main difference is when each of the obligations will apply... Reg. BI duties are tied to each recommendation a broker-dealer makes, whereas an adviser’s fiduciary duty applies to the ongoing relationship with a client.”

Finally, Director Blass explained that the proposed interpretation to clarify the standards of conduct for investment advisers is intended to “draw together a range of sources and provide advisers with a reference point for understanding their obligations to clients.”

Liquidity Risk Management

The second part of Director Blass’ remarks concerned the liquidity risk management rule—Rule 22e-4 under the Investment Company Act of 1940—adopted by the SEC in 2016, including recent developments concerning the rule’s implementation and aspects that have been the subject of “targeted changes,” such as certain public reporting requirements. (These developments have been addressed at length in prior Regulatory Updates andWhite Papers.) 1 Notably, the prominent theme in Director Blass’ discussion of the liquidity risk management rule is that the SEC staff has actively engaged with industry participants and concerned parties to understand and address, among other things, “unintended consequences” and important implementation and reporting questions relating to the new rule, and where appropriate, has recommended rule modifications. In this connection, for instance, Director Blass notes that proposed changes to the rule issued by the SEC in March which would create a new requirement for funds to discuss their liquidity risk management programs in their annual shareholder reports, in lieu of certain public disclosure of aggregated fund liquidity buckets.

Revisiting her opening point of emphasis for industry engagement, Director Blass concluded her remarks by observing that “[q]uality engagement was extremely valuable to our efforts on investment professional relationships and liquidity” and that such public input “is all the more valuable in the final rule recommendations that we will need to make.”

The transcript of Director Blass’s remarks is available at: https://www.sec.gov/news/speech/blass-remarks-pli-investment-management-...


1 The SEC adopted the liquidity risk management rule in October 2016. For a more detailed discussion of the rule, please see the Vedder Price White Paper, “SEC Adopts New Rules Mandating Open-End Fund Liquidity Risk Management Programs and Permitting Swing Pricing,” published on October 28, 2016 and available at: http://www.vedderprice.com/SEC-Adopts-New-Rules-Mandating-Open-End-Fund-...

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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,...

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