Regulation Best Interest ("Reg BI") 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. On August 4, 2020, the SEC's Division of Trading and Markets staff ("Staff") provided additional guidance in complying with Reg BI,1 particularly with respect to the definition of "retail customer," the disclosure obligation as it relates to the use of the term "advisor" or "adviser" and the care obligation.
- A regulated financial services industry professional, acting in a personal capacity for her or his own account, who receives from a broker-dealer a recommendation of a securities transaction or investment strategy involving securities is considered a "retail customer" for purposes of Reg BI. Although the recipient of such recommendation is a regulated financial services industry professional, it would not excuse a firm from complying with Reg BI because the recipient would be a natural person receiving and using the recommendation for personal, family, or household purposes.
- A broker-dealer that is not also a registered investment adviser may not use the term "adviser" or "advisor" in its firm's "doing business as" marketing or legal name.
- Financial professionals of a broker-dealer that is dually-registered as an investment adviser, including those who are not also supervised persons of an investment adviser, may use or distribute firm materials that generally describe its financial professionals as "financial advisors" or by another general title using the term "adviser" or "advisor." The use of such language, by itself, would not presumptively violate the capacity disclosure requirement under the Disclosure Obligation. However, when making a recommendation, they must make full and fair disclosure of all material facts relating to the scope and terms of the relationship with a retail customer, including the capacity in which they are acting with respect to the recommendation. Hence, a financial professional who is not also a supervised person of an investment adviser would not be permitted to use her or his own materials that refer to herself or himself as an "adviser" or "advisor" notwithstanding her or his firm's registration status.
- Financial professionals of a standalone broker-dealer (i.e., not dually registered as an investment adviser) may not use or distribute firm materials, such as marketing materials that generally refer to its financial professionals using the terms "advisers" or "advisors." However, where a financial professional is also a supervised person of an investment adviser, such individual may use her or his own materials (or materials prepared by the registered investment adviser) that refer to herself or himself as an "adviser" or "advisor."
- A broker-dealer, whether standalone or dually registered as an investment adviser, may use or distribute issuer-prepared materials, such as a prospectus that generally refers to financial professionals using the terms "advisers" or "advisors," without violating the capacity disclosure requirement under the Disclosure Obligation. When making a recommendation, however, these financial professionals must make full and fair disclosure of all material facts relating to the scope and terms of the relationship with a retail customer, including the capacity in which they are acting with respect to the recommendation.
- As to an associated person of a broker-dealer who also offers services on behalf of a bank ("dual-hatted broker-dealer-bank employee"), Reg BI would not apply when a dual-hatted broker-dealer-bank employee is acting in the capacity of a bank employee. Reg BI applies only when a broker-dealer is making a recommendation in the capacity of a broker-dealer. However, if a dual-hatted broker-dealer-bank employee is providing a recommendation to a retail customer in her or his broker-dealer capacity, the use of the name or title "adviser" or "advisor" violates the Disclosure Obligation unless such individual is also a supervised person of an investment adviser.
- Where a customer holds securities in a brokerage account (for which she has paid transaction-based compensation, including commissions, markups, and upfront sales loads), a dually-registered financial professional in her broker-dealer capacity may not recommend that she roll over or transfer such assets from her brokerage account to an advisory account where she will be charged an ongoing assetsunder-management fee, unless the financial professional has a reasonable basis to believe that the recommendation is in the retail customer's best interest at the time of the recommendation and does not place the financial professional's financial or other interest ahead of the interest of the retail customer. Factors to consider are the potential risks, rewards, and costs of a particular security or investment strategy, in light of the particular retail customer's investment profile.2
- In determining the capacity in which a dually-registered financial professional offering both advisory and brokerage accounts is making a recommendation, the facts and circumstances test should be applied and these factors, among other factors, should be considered: the type of account, how the account is described, the type of compensation and the extent to which the dual-registrant made clear to the customer the capacity in which it was acting. Where a dually-registered financial professional may not yet know and has not clearly disclosed the capacity in which he or she is acting to a potential retail customer, the financial professional should assume that both Reg BI and the Investment Advisers Act of 1940 (the "Advisers Act") would apply, and the account recommendation generally should be evaluated under both Reg BI and the Advisers Act. Nevertheless, a dual-registrant is considered an investment adviser solely with respect to those accounts for which a dual-registrant provides investment advice or receives compensation that subjects it to the Advisers Act, and Reg BI would not apply in this situation even if the retail customer has a brokerage relationship with the dual-registrant or the dual-registrant executes the transaction in its brokerage capacity.
Originally published in REVERSEinquiries: Volume 3, Issue
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1. Available at https://bit.ly/2UzzaRM.
2. For a discussion of an investment adviser's fiduciary duty, which would apply to a financial professional acting in the capacity of an investment adviser, see Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (June 5, 2019) [84 FR 33669 (July 12, 2019)] at 33670-78.
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