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LSTA Submits Comment Letter on SEC Fiduciary Standard Proposal

August 9, 2018 - While the major regulation that we have seen in the past decade has ebbed, there continue to be a number of new rules that could affect the loan market. We detail a recent SEC release – and the industry response – below.

As we noted in March, the Securities and Exchange Commission earlier this year issued a two-part release that could impact investment managers - including loan managers.  The first part proposes (i) an interpretation regarding the standard of conduct the SEC expects from investment advisers and (ii) a requirement that advisers deliver to retail investors Form CRS (Client Relationship Summary), a four-page customer or client relationship summary disclosing the nature and scope of services provided by the firm, the types of fees customers would incur, the conflicts of interest faced by the firm and the firm’s disciplinary history.  The second part of the release requests comments regarding proposed enhanced investment adviser regulation.  The LSTA this week submitted a comment letter on the two proposals, broadly supporting the recommendations of the Investment Advisers Association (“IAA”).  The LSTA added a recommendation regarding Form CRS that would be relevant to some registered advisers that manage loans.  The LSTA comment letter is available here and the IAA letters are available here and here.  David Dickstein and Phillip Koh of Katten assisted the LSTA in the preparation of its letter.

The IAA, which represents the interests of over 600 registered adviser firms, made the following key comments on the SEC proposals.  With respect to the SEC’s proposed standard of conduct for investment advisers, the IAA does not believe it necessary or beneficial to codify the fiduciary duty in a rule. The well-established, principles-based duty owing from an adviser to a client has successfully served as the bedrock principle of investor protection of clients for more than 75 years.  Moreover, certain aspects of the SEC’s duty of care discussion are retail-focused. The IAA recommends a more principles-based approach, so that the duty of care can be tailored based on different client types (e.g., retail versus institutional).  Finally, the IAA requests clarification on a number of specific issues including some confusing statements the SEC made relating to disclosure and informed consent. (For example, the SEC’s proposed interpretation says that “the investment adviser cannot disclose or negotiate away, and the client cannot waive, the federal fiduciary duty” but is very ambiguous on the circumstances in which the SEC would deem disclosure and consent to be insufficient to cure an adviser’s conflict).

Regarding Form CRS, the IAA agrees with the goal of helping investors understand the type of financial professional they are dealing with and what they should expect from that relationship. However, they believe that as proposed, the form may exacerbate the investor confusion it is intended to address.  Consequently, they also believe that it is critical that the SEC test the form with investors – along with alternative approaches – in order to develop disclosure that is demonstrably effective. The IAA urges the Commission to publish the results of its investor testing in a way that facilitates further comment by both investors and financial professionals.  The IAA also urges the SEC to provide the educational tools to investors on its website to help them compare investment advisers and brokers – and other financial professionals – rather than requiring registered advisers to describe other firms’ services on their Form CRS.   Finally, the IAA believes that Form CRS should be streamlined to focus on the most critical aspects of the relationships and services being offered by each firm to investors. The summary should eliminate technical language and industry jargon to the extent possible and work in tandem with other disclosures to ensure that investors fully understand material conflicts of interest.

While concurring with the IAA, the LSTA adds in its comment letter the suggestion that the SEC exempt investment advisers from the Form CRS requirement if their only advisory clients are “qualified clients” as defined under the ‘40s Act.  The LSTA believes that qualified clients are sophisticated, high net worth individuals who do not need the information in Form CRS which was crafted for “retail investors”.

The SEC will now sift through and respond to the many comments submitted and the LSTA will continue to follow this issue closely.  Please reach out to LSTA General Counsel Elliot Ganz with any questions.

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