On June 5, 2019, the SEC published an interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940. The objective of the Proposed and Final Interpretations was to reaffirm and clarify certain aspects of an adviser’s fiduciary duty under Section 206 of the Advisers Act. In the SEC’s view, the Final Interpretation does not create new obligations.

Our Legal Update describes the SEC’s interpretation of an adviser’s standard of care and, where important or interesting, compares points made in the Proposed Interpretation and those in the Final Interpretation.

This Lexis Practice Advisor® market trends article identifies comprehensive disclosures related to cybersecurity risks, including discussions about the potential reputational, financial, or operational harm resulting from cybersecurity breaches; the potential associated litigation or regulatory costs; and their policies and procedures addressing cybersecurity incidents, and concludes with practical advice on preparing the required disclosures regarding cybersecurity risks and incidents. The company name, its industry, and the type of filing are also provided in each sample disclosure for reference.

Read our Market Trends 2018/19: Cybersecurity Related Disclosures article.

As we previously blogged, on June 5, 2019, the SEC adopted Regulation Best Interest. The final regulation includes obligations relating to disclosure, care, conflicts of interest and compliance, which are each specific components of the general obligation. Our chart summarizes the components of Regulation Best Interest.

Read our chart here.

On June 5, 2019, the Securities and Exchange Commission (SEC) adopted Regulation Best Interest (Rule 15l-1 under the Securities Exchange Act of 1934 (Exchange Act)), which requires broker-dealers and their associated persons who are natural persons to act in the best interest of their retail customers when making a recommendation. The SEC also adopted Form CRS Relationship Summary, which requires registered investment advisers (RIAs) and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services. (Rule 17a-14and Form CRS under the Exchange Act.) Regulation Best Interest (Regulation BI), Form CRS and the related rule will become effective 60 days after their publication in the Federal Register. The compliance date for both rules is June 30, 2020.

This Legal Update necessarily summarizes the principal aspects of Regulation Best Interest, as the Release runs to 771 pages.

Business development companies (BDCs) are closed-end investment management companies that are specially regulated by the Investment Company Act of 1940, as amended (the 1940 Act). This Lexis Practice Advisor® market trends article covers recent commercial and regulatory trends affecting BDCs, particularly focusing on various types of securities offerings by public and private BDCs.

Read our Market Trends 2018/19: Business Development Companies article.

This Lexis Practice Advisor® market trends article identifies Brexit-related disclosures that offer detailed discussions of its effects, including how Brexit might impact the company, its employees, management, operations, and prospects. The company name, its industry, and the type of filing are also provided in each sample disclosure for reference. This article concludes with recommendations on how to enhance Brexit-related disclosures and how to make them consistent with SEC’s expectations.

Read our Market Trends 2018/19: Brexit Disclosure article.

At today’s open meeting, the Securities and Exchange Commission adopted a final Regulation Best Interest, as well as additional guidance.

Final action relating to the broker-dealer standard of conduct had been anxiously anticipated.  The Commission noted that Regulation Best Interest enhances the standard of conduct beyond the current broker-dealer suitability standard.  In addition, the Commission adopted a requirement for a Form CRS Relationship Summary.  The Form CRS will require registered investment advisers and broker-dealers to provide retail investors with a plain English explanation about the relationship with the financial professional.

In its Fact Sheet, the Commission also noted that it “also issued an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients under the Advisers Act.  The interpretation reflects how the Commission and its staff have applied and enforced the law in this area, and inspected for compliance, for decades.  By highlighting principles relevant to the fiduciary duty, investment advisers and their clients will have greater clarity about advisers’ legal obligations. Finally, the Commission issued an interpretation of the ‘solely incidental’ prong of the broker-dealer exclusion under the Advisers Act, which is intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser within the meaning of the Advisers Act.  This interpretation confirms and clarifies the Commission’s position, and illustrates the application in practice in connection with exercising investment discretion over customer accounts and account monitoring.”

The adopting release can be found here for Regulation Best Interest and here for Form CRS.  Additional guidance are expected to be released shortly.

The rules and forms will be effective 60 days from publication in the Federal Register and the interpretations will be effective upon publication in the Federal Register.  By June 30, 2020, registered broker-dealers must begin complying with Regulation Best Interest and broker-dealers and investment advisers registered with the Commission will be required to prepare, deliver to retail investors, and file a relationship summary.

Additional analysis will follow.

In previous blog posts, we have discussed PCAOB Staff Guidance on the basics of critical audit matters (CAMs), the determination of CAMs and the methodologies for CAMs compliance. In a recent PCAOB Staff Guidance, “Implementation of Critical Audit Matters: A Deeper Dive on the Communication of CAMs,” the Staff focuses on CAM communications. There are four aspects of the CAM communications requirements: (i) identification of the CAM, (ii) principal considerations relating to the auditor’s determination that a matter constitutes a CAM, (iii) description of how the CAM is addressed and (iv) reference to financial statement accounts or disclosures relating to the CAM. The language used to communicate a CAM must provide the CAM definition, the period(s) as to which CAMs relate, and indicate that CAMs do not alter the auditor’s opinion. Auditors should not imply they are providing a separate opinion on the CAM or on the accounts or disclosures to which the CAM relates. If the auditor determines there are no CAMs, the auditor must provide the CAM definition and indicate that there are no CAMs.

In the Staff FAQs, the Staff provides detailed guidance on how an auditor should describe the considerations leading to the determination of a CAM, descriptions of audit procedures as part of the CAM communication and other CAM communication recommendations.

The Securities and Exchange Commission posted an Open Meeting Agenda for June 5, 2019, when the Commission will vote on whether to adopt Regulation Best Interest, the related Form CRS Relationship Summary and a standard of conduct for registered investment advisers (“RIAs”). The agenda is available at: https://www.sec.gov/news/openmeetings/2019/agenda060519.htm.  It is not known whether the final Regulation Best Interest, Form CRS and the standard of conduct will be significantly revised based on comments received since their original proposal.

Regulation Best Interest, as originally proposed, would require broker-dealers to act in the best interests of their retail customers, although the proposed rule did not define the term “best interest.”  The proposed rule would require that certain conflicts of interest between a broker-dealer and his or her customer be either disclosed or, in some cases, eliminated. The proposed rule would also require broker-dealers and RIAs to provide a short form to their customers, summarizing salient facts about their relationship.

A competing, and stricter, rule, imposing a fiduciary standard on broker-dealers and RIAs for sales to retirement plans and originally proposed by the Department of Labor (“DOL”), but held unenforceable by the Fifth Circuit, is once again on the DOL’s agenda. The DOL’s Spring 2019 regulatory agenda lists a notice of proposed rulemaking for December 2019 for the “Fiduciary Rule and Prohibited Transaction Exemptions.” The regulatory agenda is available at: https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201904&RIN=1210-AB82.

On October 31, 2018, the Securities and Exchange Commission (the “SEC”) adopted new property disclosure requirements for mining company registrants. The new rules, codified in Subpart 1300 of Regulation S-K, aim to replace the SEC’s thirty-year-old Industry Guide 7 by providing investors with a more comprehensive disclosure of a public company’s mining properties. Changes include: closer alignment with the Committee for Reserves International Reporting Standards (“CRIRSCO”), disclosure of mineral resources using technical report summary, disclosure of exploration results and responsibilities and potential liabilities for “qualified persons.” Additionally, the new rules adopted a two-year transition period during which a mining registrant is not required to comply with the new rules until its first fiscal year beginning on or after January 1, 2021.

While the EDGAR reprogramming changes are being completed, the SEC stated in a notice dated May 7, 2019, that a mining registrant may elect to voluntarily comply with the new rules as long as it satisfies all of Subpart 1300’s provisions and existing EDGAR requirements. Before EDGAR reprogramming is completed, registrants electing early compliance should file a technical report summary under Item 601(b)(99) of Regulation S-K or Exhibit No. 15 of Form 20-F; and once EDGAR reprogramming is completed, such report should be filed under Item 601(b)(96) of Regulation S-K. On the other hand, registrants not electing early compliance should continue their compliance with Industry Guide 7 until they are required to comply with the new rules.