Global Trustee and Fiduciary Services News and Views Issue 50

Global Trustee and Fiduciary Services News & Views | Issue 50 | 2018 81 are based on sales of certain securities or accumulation of assets under management. The SEC concludes that broker-dealers that make recommendations to retail customers that involve such compensation practices should carefully assess the ability to mitigate these financial incentives and whether they can satisfy their best interest obligation. What information will broker-dealers and investment advisers have to disclose to customers/clients in Form CRS? The Form CRS Proposal requires broker-dealers, investment advisers, and dual registrants to provide certain prescribed and narrative disclosures in a new Form CRS. Form CRS would need to be provided to natural person investors before or at the time the investor engages the services of a broker-dealer, or before or at the time the investor enters an advisory agreement with an investment adviser. The relationship summary required by the form is limited to a maximum of four pages, and must include the following: 1) an introduction; 2) a description of the broker-dealer’s, adviser’s or dual registrant’s relationship with the retail customer or client and the services provided; 3) the standard of conduct applicable to the relationship; 4) a summary of fees and costs; 5) a comparison of advisory and brokerage services; 6) a disclosure of certain conflicts of interest; 7) additional information, such as disciplinary history and other resources; and 8) key questions that the retail customer or client should ask the broker- dealer or investment adviser. How is the Proposed Interpretation for investment advisers different from the fiduciary standard that exists today? The Proposed Interpretation for investment advisers is not significantly different from the fiduciary standard that exists today for investment advisers. In the words of the SEC, the Proposed Interpretation is an attempt to “reaffirm — and in some cases clarify — certain aspects of the fiduciary duty that an investment adviser owes to its clients under section 206 of the Advisers Act.” The interpretation notes that SEC-registered investment advisers are subject to a duty of care and a duty of loyalty and that the fiduciary duty requires each adviser, at all times, to serve the best interest of its clients and not subordinate its clients’ interest to its own. What is the potential impact of the rule package on fund managers and sponsors? The Regulation BI Proposal would not necessarily have a direct impact on investment fund managers and sponsors. However, certain aspects of the proposal, as we have discussed, would likely result in significant shifts in the marketing of investment funds. Examples of these impacts include the following: • As noted above, the Regulation BI Proposal suggests that broker-dealers consider eliminating the payment or receipt of certain types of non-cash compensation, including sales contests, trips, prizes, and other similar bonuses that are based on sales of certain securities or accumulation of assets under management. The SEC suggests that broker- dealers may not be able to comply with the best interest obligation due to the conflicts of interest arising from these types of financial incentives. Moreover, the Regulation BI Proposal states that heightened mitigation measures may be necessary if compensation arrangements are less transparent, such as when a broker-dealer or registered representatives receive payments from a third party. Thus, to the extent that a fund manager or sponsor makes third- party payments (whether cash or non-cash compensation arrangements) to broker- dealers and their registered representatives in connection with the marketing of its funds, such funds may become disfavored investments among the broker-dealers that distribute them because of the compliance risk such payments present. • As discussed, the SEC lists potential practices that broker-dealers should consider incorporating into their supervisory programs, including minimising compensation incentives for employees to favour one type of product over another, or proprietary or preferred provider products (by, for example, establishing differential compensation criteria based on neutral factors such as the time and complexity of the work involved), or eliminating compensation incentives within comparable product lines. Broker-dealers affiliated with fund managers and sponsors may thus encounter enhanced compliance risk when they distribute the funds sponsored, issued, or managed by their affiliates. Moreover, because Regulation BI will put a certain