The Office of the Investor Advocate released its “Report on Activities for the Fiscal Year 2018” (the “Report”). During the 2018 fiscal year, the Investor Advocate focused significant attention on proposed Regulation Best Interest and on the standard of conduct applicable to broker-dealers and investment advisers. In the Investor Testing section of the Report, the Office summarized some of the key findings from its survey, “Research on the Market for Investment Advice.” These findings, which are summarized below, should help inform the Commission’s consideration of proposed Regulation Best Interest:

Most investors do not currently receive financial advice regarding their assets. Consumers were asked whether they are currently consulting a financial professional regarding their investment strategies, the type of account to open, or specific financial investments. The aim of these questions was to determine the percentage of investors that receive financial advice from professionals. Only 38.7% of consumers responded “yes” to one or more of these questions. This research shows that the majority of investment decisions are not informed by professional advice. The cost associated with finding and screening an investment professional was among the leading reasons that investors cited for not seeking professional advice. The finding that the majority of investment decisions are not professionally informed may be a cause of concern for regulators.

Most consumers of investment advice turn to “dual-hatted” professionals. The majority of financial advice consumers receive is delivered by a dual registered broker-dealer and investment adviser. Only 3.8% of advice seekers work with a professional that is exclusively registered as a broker-dealer. The majority of consumers were unable to identify the correct legal status of their financial professional.

The general public does not understand the obligations arising from the requirement to act in the customer’s “best-interest.” A survey of investor understandings of the term “best interest” found that 73% of investors believe that the reference to “best interest” requires financial professionals to help them choose the lowest cost product; all else being equal, 6.1% thought that it required professionals to avoid taking higher compensation for selling one product when similar but less costly products are available, and 86% thought that it required professionals to monitor their account on an ongoing basis. However, the proposed best interest standard applies to broker-dealers who are generally not required to actively monitor accounts as part of their service offerings. Furthermore, it is unclear whether the best interest standard would require professionals to choose the lowest cost product.


Elder financial exploitation has been recognized by many state and national agencies as a concern as the population ages and elders shoulder more responsibility for managing their retirement assets under defined contribution plans.  For investment advisers and broker-dealers, balancing the protection of customer information and reporting financial exploitation is challenging.  Fortunately, state and national authorities have taken actions to ease the regulatory tension.

State Regulations

Most states have laws in place to address elder financial exploitation.  Under state laws, a financial institution, such as an investment adviser or a broker-dealer, that complies with the rules is immune from civil and administrative liability for reporting suspected elder financial exploitation.  State regulatory regimes that apply to financial institutions can be split into two groups:  the permissive and the mandatory.  Under the mandatory reporting regime, a financial institution has a duty to report suspected elder financial exploitation.  In the permissive reporting regime, a financial institution reporting elder financial exploitation is immune from liabilities but has no obligation to report such exploitation.  In addition, some state laws permit a financial institution to put a temporary hold on disbursals upon a reasonable suspicion of financial exploitation.

National Regulations

On the national level, three notable efforts were taken to address the elder financial exploitation.  Earlier this year, FINRA amended two rules to curb elder financial exploitation.  FINRA Rule 2165 allows a broker-dealer to place a temporary hold on disbursements from a client’s account when elder financial exploitation is suspected.  If the member firm places a hold on a customer’s account, FINRA Rule 4512 requires the firm to take reasonable efforts to notify the trusted contact of that account to address possible financial exploitation.

More recently, President Trump signed the Senior Safe Act of 2018 (the “Act”) into law.  The Act encourages reporting of elder financial exploitation by providing immunity for covered financial institutions that make reporting in good faith and with reasonable care.  Covered financial institutions under the Act include credit unions, depository institutions, investment advisers, broker-dealers, insurance companies, insurance agencies, and transfer agents.  The Act also encourages training at covered financial institutions by making the immunity from liability contingent on certain training specified in the Act.  Under the Act, covered individuals and financial institutions will not be liable for disclosure of information made to certain state and federal regulatory agencies.  The Act also has limited preemption provisions.  State laws that do not provide immunities for covered financial institutions and individuals for reporting elder financial exploitation will presumably be preempted by the Act.

In addition, a recent bipartisan bill introduced in Congress titled the “National Senior Investor Initiative Act of 2018” proposes to create a task force within the SEC to focus on the challenges senior investors face.  The task force would work with national and state authorities and issue biennial reports with recommendations for regulatory or statutory changes benefiting senior investors.  Furthermore, the bill would require a study on direct and indirect costs resulting from elder financial exploitation.

Potential Issues

While the Senior Safe Act is a positive step towards a uniform regulatory regime on elder financial exploitation, it does not resolve all the issues.  Because the Act has only limited preemption of state laws, there are potential inconsistent regulatory requirements across states.

Who are covered financial institutions and individuals?

Under the Act, covered financial institutions include credit unions, depository institutions, investment advisers, broker-dealers, insurance companies, insurance agencies, and transfer agents.  The individuals covered under the Act are limited to certain individuals with specified roles.  Under some state statutes, covered financial institutions include only depository institutions and credit unions, but all officers and employees of the covered financial institutions are covered.

Who are protected adults?

The Act only protects adults age 65 and older, while FINRA Rule 2165 and some state laws protect both elder adults and adults with a mental or physical impairment.

What is financial exploitation?

The definition of financial exploitation varies from state to state and from agency to agency.  For example, under the Act, exploitation is defined to include “fraudulent or otherwise illegal, unauthorized, or improper act or process of an individual… that … results in depriving a senior citizen of rightful access to or use of benefits, resources, belongings, or assets.”  This definition does not require wrongful use. Some state statutes, on the other hand, require “wrongful use.”  Furthermore, only an individual is capable of committing financial exploitation under the Act and FINRA Rule 2165, while in some states, both an individual and entity are capable of committing financial exploitation.

Other considerations

Finally, even when reporting elder financial exploitation is optional, a financial institution should carefully consider the potential risks of inconsistent practices across different offices and the reputational risks in the event an incident of elder financial exploitation goes unreported.  Consequently, a financial institution should balance the risk and benefits when developing or revisiting reporting policies and procedures.  To be eligible for the immunity provided by the Act, a financial institution must implement training programs, or update existing programs, to meet the requirements of the Act.

Read our full REVERSEinquiries issue here.

Wednesday, August 15, 2018
1:00 p.m. – 2:00 p.m. EDT

PIPE transactions remain an important capital-raising alternative. Whether a public company is seeking to finance an acquisition, effect a recapitalization or restructuring, or facilitate a liquidity opportunity for an existing stockholder, a PIPE transaction may be the most efficient approach.

During this session, Partner Anna Pinedo will discuss:

  • Recent market trends;
  • PIPE documentation and the principal negotiating issues;
  • The securities exchange shareholder approval rules and proposed changes to such rules;
  • Using warrants and structuring approaches;
  • Acquisition-related PIPE transactions; and
  • Selling stockholder PIPE transactions.

For more information, or to register for this complimentary session, please visit the event website.

The Securities and Exchange Commission Office of Investor Advocate released its report on the objectives of the Office for Fiscal Year 2019. The report cites the following among its principal objectives:

  • Public companies and public company disclosures. The report notes that the Commission should be encouraging companies to undertake initial public offerings; however, the report expresses concerns that the Commission has focused on regulatory burden reduction and that may affect the quality of disclosures available about public companies.
  • Fixed income market structure. The Office will focus on rulemaking relating to the fixed income markets that impact retail investors in municipal bonds and corporate bonds.
  • Proposed Regulation Best Interest. The Office intends to focus on the proposed regulation and has been conducting investor testing. The Office also intends to run controlled experiments related to the optimal length of Form CRS and the utility of video and web-based delivery.
  • Transfer agents. The Office will examine issues relating to transfer agents and transfer agent rules given that transfer agents function as gatekeepers.

On April 18, 2018, the Securities and Exchange Commission (SEC) introduced a package of proposals aimed at enhancing the quality and transparency of investors’ relationships with investment advisers and broker-dealers. The proposed Regulation Best Interest introduces three obligations for broker-dealers designed to require broker-dealers to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities: the disclosure obligation, the care obligation, and the conflict of interest obligation. Given that the Regulation Best Interest proposing release is well over 1,000 pages, we have summarized in a chart key aspects of the proposed rule. Our chart is available here.

On May 23, 2018, the Securities and Exchange Commission (the “Commission”) proposed establishing a research report safe harbor (Rule 139b) for unaffiliated brokers or dealers that publish or distribute research reports that cover investment funds.  The Commission took this action in furtherance of the mandate of the Fair Access to Investment Research Act of 2017 (the “FAIR Act”).  The FAIR Act required the Commission to expand the Rule 139 safe harbor for research reports to cover research reports on investment funds.  Rule 139 permits a broker or dealer that is distributing an issuer’s securities to publish a research report about those securities without the report itself being deemed an offer to sell such securities.  If adopted as proposed, the safe harbor would be made available to research reports on mutual funds, exchange-traded funds, registered closed-end funds, business development companies and similar covered investment funds.  The safe harbor would be unavailable with respect to broker-dealers’ publication or distribution of research reports about closed-end registered investment companies or business development companies during their first year of operation.  The adoption of an expanded safe harbor would reduce obstacles that currently prevent certain investors from accessing research reports on investment funds.  However, the safe harbor would not extend to research reports issued by brokers or dealers affiliated with the investment fund.  The public comment period will remain open for 30 days.  The proposed rule is available here.

Effective May 11, 2018, the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) implemented a new customer due diligence requirement.  The requirement applies to certain financial institutions, including banks, broker-dealers and mutual funds, at the time each new account is opened.  The rule enhances the information that financial institutions must collect regarding the identity of individuals (i.e., beneficial owners) who own or control their legal entity customers, which includes any corporation, limited liability company or partnership.  Information must be collected for each owner of 25% or more of the equity interests of a legal entity customer.  As a result of the rule’s recent implementation, financial institutions are devoting significant time and resources to modifying their internal systems and to implementing appropriate procedures to ensure compliance with the rule.  Certain entities are excluded from the definition of “legal entity customer.”  For example,  SEC reporting companies are excluded from the rule because they are subject to public disclosure and reporting requirements that provide information similar to what would otherwise be collected under the rule. Companies listed on foreign exchanges are not excluded from the definition of legal entity customer. Such companies may not be subject to the same or similar public disclosure and reporting requirements as companies publicly traded in the United States and, therefore, collecting beneficial ownership information for them is required. Certain institutions are considering revising some standard form agreements, including underwriting agreements and engagement letters, to include ownership certification representations and covenants to ensure compliance.  FinCEN has provided financial institutions with a certification form that may be used to obtain the required beneficial ownership information.  To read FinCEN’s “Frequently Asked Questions” relating to the new rule, please click here, and to read SIFMA’s memorandum relating to the new rule in the context of certain sales of securities, click here (with attachments providing form certifications at the 25% equity ownership threshold and 10% equity ownership threshold).