SEC Adopts Regulation Best Interest for Brokers, Related Interpretive Guidance Under the Investment Advisers Act and Forms for Required Relationship Summaries for Broker Customers and Advisory Clients
On June 5, the SEC adopted a long-awaited suite of rules, interpretive guidance and forms that, in the words of the accompanying press release, is “designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.” The package consists of four elements, three of which had been proposed previously:
- Regulation Best Interest, requiring a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer;
- Interpretive guidance regarding the standard of conduct for investment advisers;
- Rules for brokers and investment advisers creating a requirement to provide a new short-form relationship summary, in new Form CRS, for brokers, and in an amended Form ADV, for investment advisers; and
- Interpretive guidance regarding the solely incidental prong of the broker-dealer exclusion from the definition of investment adviser. This guidance was not proposed previously but is, according to the release, consistent with prior SEC guidance and relevant case law.
Regulation Best Interest and the rules requiring the use of relationship summaries will be effective 60 days after publication of the rules in the Federal Register. The compliance date for Regulation Best Interest is June 30, 2020. Firms that are registered as broker-dealers or investment advisers, or investment advisers who have an application for registration pending, with the SEC prior to June 30, 2020, will have a period of time beginning on May 1, 2020, until June 30, 2020, to file their initial relationship summaries with the SEC. On and after June 30, 2020, each newly registered broker-dealer will be required to file its relationship summary with the SEC by the date on which its registration with the SEC becomes effective, and the SEC will not accept any initial application for registration as an investment adviser that does not include a relationship summary that satisfies the requirements of Form ADV. Goodwin is preparing a Client Alert on the rules and interpretations for future release.
On June 6, the FCC approved a Declaratory Ruling and Notice of Proposed Rulemaking to affirm that voice service providers may, as the default, block unwanted calls based on reasonable call analytics, as long as their customers are informed and have the opportunity to opt out of the blocking. The ruling is effective immediately. While many phone companies now offer their customers call blocking tools on an opt-in basis, the Declaratory Ruling clarifies that they can provide them as the default, thus allowing them to protect more consumers from unwanted robocalls and making it more cost-effective to implement call blocking programs. The ruling also clarifies that providers may offer their customers the choice to opt in to tools that block calls from any number that does not appear on a customer’s contact list or other “white lists.” This option would allow consumers to decide directly whose calls they are willing to receive. Consumer white lists could be based on the customer’s own contact list, updated automatically as consumers add and remove contacts from their smartphones.
The FCC also adopted a Notice of Proposed Rulemaking that proposes requiring voice service providers to implement the SHAKEN/STIR caller ID authentication framework, if major voice service providers fail to do so by the end of this year. It also seeks comment on whether the FCC should create a safe harbor for providers that block calls that are maliciously spoofed so that caller ID cannot be authenticated and that block calls that are “unsigned.”
On June 5, the CFPB issued a final rule extending the compliance date for the mandatory underwriting provisions of its final rule governing short-term, small-dollar loans, from August 19, 2019, to November 19, 2020. As previously reported in the February 13, 2019, edition of the Roundup, the CFPB has separately proposed to rescind those underwriting requirements.
The SEC has proposed to amend the definitions of accelerated filer and large accelerated filer to exclude companies that had annual revenues of less than $100 million in their most recent fiscal year and are eligible to be a smaller reporting company (SRC) under SEC rules. The amendments would also revise the transition thresholds to make it slightly easier for companies to exit accelerated filer and large accelerated filer status based on their public float. The result would be an increase in the number of companies that are non-accelerated filers, which are not required (1) to have the company’s independent auditor attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting (ICFR) or (2) to file periodic SEC reports within the accelerated deadlines that apply to accelerated filers. For more information, read theclient alert from Goodwin’s Public Companies practice.
In an effort to reduce the complexity and compliance costs of financial disclosures for significant acquisitions or dispositions of businesses, the SEC has proposed rules to reduce the scope of certain required financial disclosures by registered companies that relate to the financial effects of the acquisition or disposition. The proposed amendments also modernize certain inputs and metrics in the required disclosures, which the SEC believes will facilitate more timely access to capital and provide investors with more relevant information than the current requirements.
Public comments on the proposed amendments are due July 29, 2019, and can be submitted online via https://www.sec.gov/cgi-bin/ruling-comments by referencing S7-05-19. For more information, read the client alert from Goodwin’s Public M&A and Corporate Governance group.
The SEC has proposed amendments to Rule 3-14 of Regulation S-X and related rules and forms that are intended to harmonize the financial statement disclosure requirements in connection with acquisitions of significant real estate operations provided in Rule 3-14 with the requirements for acquisitions of significant businesses provided in Rule 3-05 of Regulation S-X, including with respect to the application of significance thresholds, periods to be covered by required financial statements and the timing of filing required financial statements. In addition, the proposed amendments clarify existing guidance concerning the application of Rule 3-14, and would include a number of technical revisions to Rule 3-14. The proposal is subject to a 60-day public comment period that ends on July 29, 2019. For more information, read the client alert from Goodwin’s Real Estate Industry group.
Enforcement & Litigation
On June 5, the CFPB announced that it has reached a settlement with one of the nation’s 10 largest Home Mortgage Disclosure Act (HMDA) reporters, a for-profit mortgage lender based in New Jersey. The consent order resolves alleged violations of the HMDA, 12 U.S.C. §§ 2801–2810, and its implementing regulation, Regulation C, 12 C.F.R. pt. 1003. Read the Enforcement Watch blog post.
Please join Goodwin’s Fintech practice group and FS Vector at Goodwin’s San Francisco office to discuss strategies for bringing a fintech product to market using a bank partnership, lending or money transmitter licenses, or your own bank charter. This program will include workshops for fintech companies with lending, payments and deposit products on strategy execution and how to be best positioned for your next investment round. The sessions will also be valuable for banks and investors. Cocktail and networking reception follows panels. For registration information, please click here.
This week’s Roundup contributors: Emily Notini.