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Statement at the Open Meeting on Standards of Conduct for Investment Professionals

April 18, 2018

Today we have three separate items on the agenda. These items are a package. Collectively, they address the standards of conduct for investment professionals, and associated issues, that the Commission has been actively considering for nearly two decades now. I am excited for us to take this significant step forward. The word “step” is appropriate. Today, in short, we are framing the issues and proposing a comprehensive path forward on which we anticipate and welcome robust public comment.

My opening remarks will proceed in three parts.

  • First, a brief background. While a full discussion of the 20+ year background is illuminating, I will focus on the process we engaged in over the past year to bring these proposals forward.
  • Second, a discussion of the staff’s efforts, and the efforts of my fellow Commissioners, to bring us to this point.
  • Third and finally, a discussion of the proposed framework and the agenda items themselves. As my full remarks will be posted online, and as we have a lot to get through this afternoon, I will abbreviate this last part of my discussion.

Background. In early 2017, as I moved through the confirmation process, it became apparent that a wide range of market participants, including retail investors, and various members of Congress believed that standards of conduct for investment professionals — or, as we like to call it, IABD, standing for “Investment Advisers and Broker Dealers”— was a matter where Commission action, including coordination with our fellow regulators, would be both appropriate and timely.

Upon my arrival at the Commission in May 2017, I consulted with my fellow Commissioners and our staff. These consultations led me to the conclusion that the Commission should lead — but not dictate — in this area. In June 2017 I issued a request for information, seeking input from the public on a range of potential issues. Since then, I have also had scores of meetings with investors, industry participants, and others across the full spectrum of these issues. While I met with many retail investors and consumer groups, I want to particularly thank the retail investors we met with in Missouri, Montana, Illinois and California, as well as those who travelled to New York for a roundtable. Your candid comments on what you expect, and do not expect, from investment professionals have resonated with me.

The comments we received since June, as well as the Commission’s substantial prior work, have contributed greatly to the matters we consider today. My sincere thanks to all who took the time and effort to contribute. If we move forward today as I hope we will, I ask you to please stay engaged and that you do so with the same constructive perspective that has been present over the past nine months. I also look forward to engaging deeply and constructively with our fellow regulators, including the Department of Labor, state securities regulators and state insurance regulators, as well as FINRA. We have provided for a 90 day comment period to facilitate all those interactions. Our door is open.

The SEC Staff and My Fellow Commissioners. I will now turn to the SEC staff. You have performed in an exemplary manner. I am proud to be your colleague. The issues we address today span all of our Divisions and many of our Offices and are important to the estimated 43 million American households that have a retirement or brokerage account,[1] and the approximately 940,000 women and men in the investment advisory and broker dealer industry.[2]

I will attempt to illustrate the inter-Divisional cooperation this effort required by citing a few simple questions (there are many other important questions) and the Divisions and Offices whose expertise is essential to the answers.

Assume we change regulations affecting the standards applicable to the broker-dealer/customer relationship.

  • How many individual client relationships will that change affect – both in number and type? (Division of Investment Management, or “IM”; Division of Trading and Markets, or “TM”; Division of Economic and Risk Analysis, or “DERA”).
  • What effect will that change in regulation have on the products available to retail investors? (IM, TM, DERA).
  • Will the change lessen or increase the cost of investment advice? (IM, TM, DERA, Office of the Investor Advocate, or “OIAD”).
  • Will the change lessen or increase the quality of investment advice? (IM, TM, DERA).
  • Will the change lessen or increase the risk of fraud and other misconduct? (IM, TM, DERA, Office of Compliance Inspections and Examinations, or “OCIE”, Division of Enforcement, OIAD).
  • Will the new standards be more or less in line with investor expectations? (IM, TM, DERA, Office of Investor Education, OIAD).
  • Can we effectively inspect for the new standard? (IM, TM, OCIE).
  • Can investment professionals that act appropriately efficiently demonstrate that they have complied with the new standard? (OCIE, IM, TM).
  • Can we effectively enforce the new standard? (IM, TM, OCIE, Enforcement).

Our staff has faced these, and many other questions, head on. They have worked collaboratively and tirelessly across Divisions and Offices. They have examined these issues and — importantly — very importantly — identified guiding principles. These principles — and a great deal of high quality thought and analysis, informed by practical experience — have led to the proposed regulatory framework that we will consider today.

As an example of these guiding principles, throughout the process, the staff has focused on how best to bridge any gaps between what retail investors reasonably expect from their investment professional and what our laws and regulations require, while ensuring that investor access and investor choice are preserved. Being true to this principle should increase investor protection, as well as the quality of advice, without adversely affecting access and choice. The staff has considered each proposed component of the approach we consider today against these principles, both individually and as part of the overall package. This latter piece is important — the provisions of this package interlock with one another in many ways, and are intended to be mutually supportive. If we move forward today, this focus on guiding principles will continue, with welcome input from our fellow regulators and market participants.

My fellow Commissioners and their respective staffs also have provided very valuable input and perspective on the matters we consider today. You have my sincere thanks and respect for your efforts and views. I believe the product brought forward today is much better as a result of your constructive engagement. In this regard, while I recognize that each of us would calibrate the various aspects of the approach differently, our discussions have strengthened my conclusion that the framework of our approach is sound.

Summary of Framework and Agenda Items. The framework of our proposal is straightforward. It reflects our efforts to fill the gaps between investor expectations and legal requirements, thereby increasing investor protection and the quality of advice, while preserving investor access and investor choice, recognizing that access and choice are driven by what is available and how much it costs.

We propose to fill these gaps through (1) mandating clear disclosures — specifically, addressing how BDs and IAs identify themselves to investors and requiring them to provide investors with a standardized disclosure document of no more than four pages in length, highlighting among other things the principal services offered, legal standards of conduct that apply, fees the customer will pay, and certain conflicts of interest that exist, (2) raising the standard of conduct applicable to BDs to make it clear, among other things, that they cannot put their interests ahead of the interests of their retail customers, and (3) reaffirming, and in some cases clarifying, our views on the standard of conduct applicable to investment advisers.

This framework, along with a more detailed discussion of (1) our objectives, (2) the issues that prompted us to act, and (3) how our proposed rulemaking package advances those goals, is discussed in more detail in my posted remarks.

* * *

Before I turn it over to the staff to present their recommendations, I would like to acknowledge a few individuals, noting again, that countless current and former members of the staff contributed to this effort:

  • From the Division of Investment Management: Dalia Blass, Sarah ten Siethoff, Doug Scheidt, Holly Hunter-Ceci, Sara Cortes, Jennifer Porter, Parisa Haghshenas, Roberta Ufford, Elizabeth Miller, Emily Rowland, Jennifer Songer, Gena Lai, and Ben Kalish.
  • From the Division of Trading and Markets: Brett Redfearn, Lourdes Gonzalez, Emily Russell, Alicia Golden, Bradford Bartels, Geeta Dhingra, and Stacy Puente.
  • From the Division of Economic and Risk Analysis: Jeffrey Harris, Vanessa Countryman, Narahari Phatak, Jennifer Juergens, Mattias Nilsson, Iulian Obreja, Dan Deli, Sai Rao, Daniel Bresler, Christo Pirinsky, Bridget Farrell, and Jeremy Ko.
  • From the Office of the General Counsel: Meridith Mitchell, Lori Price, Marie-Louise Huth, Cathy Ahn, Bob Bagnall, Maureen Johansen, Monica Lilly, Michael Conley, Jeff Berger, and Dan Matro.
  • From the Office of Investor Education and Advocacy: Owen Donley, Jill Felker, Vanessa Meeks, and Suzy McGovern.
  • From the Office of the Investor Advocate: Rick Fleming, Brian Scholl, and Marc Sharma.
  • From the Office of Compliance Inspections and Examinations: Carrie O’Brien, Jennifer McCarthy, Christine Sibille, and Aaron Russ.
  • From the Division of Enforcement: Stephanie Avakian, Steven Peikin, and Dabney O’Riordan.

And now, I’d like to turn it over to Brett Redfearn and Dalia Blass, our Directors of Trading and Markets, and Investment Management, respectively, for the staff’s presentation of their recommendations.

[1] The data is obtained from the Federal Reserve System’s 2016 Survey of Consumer Finances (“SCF”), a triennial survey of approximately 6,200 U.S. households and imputes weights to extrapolate the results to the entire U.S. population. As noted, some survey respondent households have both a brokerage and an IRA. Federal Reserve, Survey of Consumer Finances (2016), available at

[2] Based on staff analysis of Form U4 filings.

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