Stark & Stark Investment Management & Securities Practice Group Submits a Comment Letter to the SEC on Recent Rule Proposals

Max Schatzow, Esq., on behalf of Stark & Stark’s Investment Management & Securities Practice Group, submitted a comment letter to the U.S. Securities & Exchange Commission (“SEC”) in response to the SEC’s proposed interpretation of the standard of conduct under the Investment Advisers Act of 1940.

While Stark & Stark largely agreed with the SEC’s proposed interpretation of the standard of conduct, it took issue with its characterization of the duty of care owed by investment advisers. As a general matter, investment advisers owe their clients both a duty of care and a duty of loyalty. Stark & Stark generally agreed with the SEC’s framework surrounding the duty of loyalty. However, the SEC’s proposed interpretation of the duty of care would require “the duty to act and to provide advice that is in the best interest of the client.”

This overly restrictive interpretation would complicate nearly a century of settled jurisprudence, which instead historically required an investment adviser to collect relevant information and investigate what action is appropriate under the circumstances. The SEC’s proposed interpretation could limit an investment adviser’s ability to disclose away conflicts of interest relating to its advice. With this interpretation, this may suggest that an investment adviser focused exclusively on asset management may have to become a financial planner. The shift in the standard would require extensive new guidance from the SEC in determining which activities fall under each of the duty of care and loyalty. Instead, Stark & Stark believes that the duty to provide advice in the best interest of the client should continue to be viewed under the duty of loyalty.

The SEC’s interpretation also suggests that advice about whether to rollover a retirement account that results in the investment adviser managing that account should be viewed under the duty of care. This appears to require an investment adviser to only recommend a rollover when they can substantiate it with data that the recommendation is in the client’s best interest as opposed to disclosing away the potential conflict of interest. This interpretation seems to track the intent of the recently rescinded Department of Labor’s Fiduciary Rule.

Furthermore, Stark & Stark commented on the SEC’s proposals regarding investment adviser representative licensing, the delivery of account statements and potential financial requirements.

You can click here to download a PDF of the full letter to the SEC, or you can view the document below.

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