Julie Jason: Should you care about the new SEC rules?

On June 5, 2019, Jay Clayton, the chairman of the U.S. Securities and Exchange Commission, announced regulatory changes that “Enhance and Clarify the Obligations Financial Professionals

Owe to our Main Street Investors.”

Should you care? This is where I can add some perspective, as someone who started her Wall Street career as a lawyer before moving to money management.

Regulators have missions that touch on your lives. In this case, they are concerned about your relationship with your financial professional, and for that reason, it’s important.

As Chairman Clayton put it, “[I] believe action is needed to address the following key issues: (1) the potential harm from misalignment between reasonable investor expectations and actual legal standards that apply to financial professionals; (2) investor confusion regarding the differences between broker-dealers and investment advisers; and (3) increasing regulatory complexity and the potential to increase confusion and reduce service offerings and investor choice.”

That’s quite a statement. Big changes are coming.

Last week, we discussed the new best interest standard that affects brokers (email me at readers@juliejason.com if you need a copy).

This week, let’s focus on a new document you will need to read and understand, called Form CRS (“Customer Relationship Summary”). The purpose of the CRS is to provide transparency and a way to compare brokers with advisers.

Disclosure of the differences will help, since studies have shown that investors don’t have a handle on who’s who. Those studies are included in the SEC’s 524-page release adopting the new disclosure rule (“Form CRS Relationship Summary; Amendments to FORM ADV” at https://www.sec.gov/rules/final/2019/34-86032.pdf). The new rule will go into effect a year from now.

The CRS is intended to provide “succinct, plain English information” to retail customers “about the relationships and services” firms offer. It will help you understand “the fees, costs, conflicts of interest and required standard of conduct associated with those relationships and services, and whether the firm and its financial professionals have reportable legal or disciplinary history.”

Again, that’s quite an undertaking, given the fact that most people don’t know that there are differences.

This is what you can expect, quoting from the release:

1) A two-page document in standardized question-and-answer format. Four pages will be allowed for dual registrants (firms that are both investment advisers and broker-dealers). There will be standardized questions that will serve as headings in a prescribed order. The goal is to “promote consistency and comparability among different relationship summaries.”

2) To help retail investors easily digest the information, firms will be “specifically encourage[d] … to use charts, graphs, tables, and other graphics or text features … to explain or compare different aspects of the firm’s offerings.”

3) The CRS will have a link to Investor.gov/CRS, which is on the SEC’s investor education website. There, investors will find educational materials that apply generally to differences between financial professionals.

4) The CRS will cover a summary of fees and costs, a description of ways the firm makes money, certain conflicts of interest and standards of conduct. Firms also will include disclosures about financial professionals’ compensation.

5) “Firms will be required to indicate … whether or not … any of their financial professionals have reportable disciplinary history.”

6) There will be a section on “conversation starters” to help retail investors “dialogue with their financial professionals about their individual circumstances.”

As the SEC said in its June 5 fact sheet, regardless of which type of financial service provider a retail investor chooses, “the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser)” that is in his or her best interest “and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.”

There are major differences between the two types of financial service providers, but they are not apparent to the Main Street investor. This is a subject we’ll come back to next week.

Julie Jason, JD, LLM, a personal portfolio manager (Jackson, Grant of Stamford, Conn.) and author, welcomes your questions/comments (readers@juliejason.com). .