Beyond the death of the fiduciary rule - What rules might be on the radar for changes?

With the fiduciary duty rule now in a zombie state, one might ask, what else is on the horizon?

The Securities and Exchange Commission (SEC) announced recently a long effort to change the way investors can access annual reports and other shareholder disclosures. That new rule, 30e-3, creates new website friendly disclosure and reporting information. It also announced an effort to gather information from designers and others in communications about how to better deliver information to the public about publicly traded companies. With the fiduciary duty rule now in a zombie state, one might ask, what else is on the horizon?


First, is the fiduciary duty rule dead or just limping? In March of 2018, the Fifth Circuit Court of Appeals killed the rule saying it was unreasonable. The only appeal of a Court of Appeals ruling would be to the Supreme Court. Soon after the appellate court vacated the rule, the Department of Labor (DOL) announced that it would not enforce it, meaning, no appeal would be taken.  This doesn’t mean that no rule will be forthcoming about enhanced fiduciary duties, only that it might not come from the DOL.  Instead, the SEC may issue a fiduciary duty rule of their own. 


One indication of such a step is that the SEC is proposing new rules under the Advisors Act and the Exchange Act to require registered investment advisers and registered broker-dealers to provide information about their business relationships to retail investors. This information, as proposed, would include the standard of conduct of the firm, services offered and fees for the services, conflicts of interest and whether any member of the firm has a reportable disciplinary event.


Another proposed rule that may follow along in the wake of the fiduciary duty rules is that the SEC may limit broker-dealers, and those working with them, from using the term advisor to specified circumstances.  The SEC is also proposing a rule to require more disclosure about the actual people involved in a broker-dealer firm, rather than layers of corporate entities.


The SEC is also proposing that the standard of conduct for investment advisors under the Advisers Act be revisited, and possibly revised. New regulations include changing the continuing education requirements for those who work with registered investment advisors, how account statements are delivered to those who have investment advisory accounts, and requirements for financial responsibility for registered advisors including, potentially, fidelity bonds.


Another standard of conduct rule the SEC is considering involves recommendations made by a broker-dealer and any individual associated with the broker-dealer when making recommendations concerning securities or investment strategies to retail customers. The new regulations on standards of conduct would involve the best interests test which would require that the interest of the retail customer be made without consideration of the interests of the broker-dealer (or individuals working for the broker-dealer) when making the recommendation about the security.


Other forthcoming SEC regulations and rules worth watching include Regulation S-X, to improve requirements for issuers of guaranteed securities and securities who collateralize other securities.  By way of reference, securities that collateralized other securities were potentially part of the stock market crash of 2008.


The SEC is also proposing changes to its whistleblower program originally adopted in 2011. The proposed changes would clarify the rule, especially as to what constitutes unreasonable delay. 


Other rule changes include allowing exchange traded funds that meet certain requirements to operate without an exemptive order.  New disclosure rules may be forthcoming concerning those who sell ETFs on a secondary market as well.


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