Global Trustee and Fiduciary Services News and Views Issue 50

Global Trustee and Fiduciary Services News & Views | Issue 50 | 2018 83 amount of pressure on broker-dealers to sell the least expensive product available between substantially similar products that meets a customer’s needs, funds that are relatively more expensive than competitors’ products may be disfavored by selling firms unless there are objective factors that make the additional costs worth bearing. • A critical component of Regulation BI is the disclosure obligation, which would require, among other things, that the broker-dealer reasonably disclose at the time of a recommendation all material conflicts of interest associated with the recommendation. While this obligation falls upon the broker-dealers selling investment funds, the broker-dealers will be looking to fund managers and sponsors for support and guidance as they seek to meet these disclosure obligations. In addition, any disclosures of fees, charges or conflicts that will be outside the norm may cause broker-dealers to favour products that do not require such disclosures. In this sense, sponsors and issuers of investment funds should review the fees, charges, and conflicts that fund investors would bear and consider the obligation of selling firms to properly disclose and mitigate them in order to sell the funds in the future. An entity that does not have any natural person clients is not obligated to prepare or deliver Form CRS. Because fund managers are deemed to manage the funds (and do not thereby have advisory relationships with the fund investors), many private fund managers will not have to prepare or deliver a Form CRS. However, broker-dealers and investment advisers who advise natural person investors would have to prepare and deliver a Form CRS and may look to fund managers for support and guidance as they seek to meet their disclosure obligations under Form CRS. Finally, although the Proposed Interpretation for investment advisers is not significantly different from the fiduciary standard that exists today for investment advisers, it would apply to fund managers and sponsors to the extent that they are registered or required to be registered under the Investment Advisers Act of 1940. Accordingly, such fund managers and sponsors should carefully review the Proposed Interpretation to ensure they are meeting their fiduciary obligations to their fund clients, and adjust their policies and procedures as necessary to come into full compliance with the standards set forth in the Proposed Interpretation. So what does this mean? The proposed rule package from the SEC could result in significant changes in the marketing of investment funds. As the SEC moves toward the adoption of final rules, fund managers and sponsors would be well served to start evaluating how they may need to adjust their marketing and distribution practices in a manner that helps broker-dealers meet their compliance obligations under any new standards that are adopted. Michael B Koffler Partner Clifford Kirsch Partner Issa J Hannah Counsel Eversheds Sutherland 1 See “Regulation Best Interest,” SEC Release No. 34- 83062 (Apr. 18, 2018) at https://www.sec.gov/rules/ proposed/2018/34-83062.pdf (hereafter Regulation BI Proposal). Link here . 2 See “Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles,” SEC Release No. 34-83062 (Apr. 18, 2018) at https://www. sec.gov/rules/proposed/2018/34-83063.pdf (hereafter Form CRS Proposal). Link here . 3 See “Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation,” SEC Release No. IA-4889 (Apr. 18, 2018) at https://www.sec. gov/rules/proposed/2018/ia-4889.pdf (hereafter Proposed Interpretation). Link here . 4 Proposed 17 C.F.R. § 240.15l-1(a)(1). 5 Proposed 17 C.F.R. § 240.15l-1(a)(2)(i). 6 Proposed 17 C.F.R. § 240.15l-1(a)(2)(ii). 7 Proposed 17 C.F.R. § 240.15l-1(a)(2)(iii).