Gearing up for the June 30, 2020 compliance date, the Securities and Exchange Commission has published a series of responses to frequently asked questions (FAQs) about its Regulation Best Interest.
The online FAQs were prepared by the staff of the SEC’s Division of Trading and Markets. They include responses to 13 FAQs addressing investment recommendations, as well as disclosure, care and conflict of interest obligations.
The web page notes that the staff plans to update the FAQs from time to time. It also cautions that the responses were prepared by and represent the views of the staff and “are not a rule, regulation, or statement of the Securities and Exchange Commission,” and that the Commission has neither approved nor disapproved its content.
“These responses, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person,” the FAQ states. Nonetheless, the responses may provide some useful insight.
As to what account recommendations are covered by Reg BI, the SEC reiterates that the regulation “expressly applies” to account recommendations including recommendations of securities account types, as well as recommendations to roll over or transfer assets from one type of account to another.
Accordingly, the staff reminds broker-dealers that the term “investment strategy” – which includes account recommendations – is to be “interpreted broadly,” and account recommendations will almost always involve a “securities transaction,” and thus, would generally be subject to Reg BI.
For dually registered financial professional making an account recommendation, the SEC advises that such professional would need to make this evaluation taking into consideration the spectrum of accounts they can offer (i.e.,both brokerage and advisory, taking into account any eligibility requirements such as account minimums) and not just brokerage accounts.
“If you are only registered as an associated person of a broker-dealer (regardless of whether you work for a dual-registrant or a broker-dealer affiliated with an investment adviser), you would need to take into consideration only the brokerage accounts available at your firm,” the FAQ further explains.
Addressing communications in informal settings, the FAQ notes that if a broker-dealer engages in a communication with a retail customer that rises to the level of a recommendation, whether in the context of a casual “hire me” conversation or otherwise, the recommendation will be subject to Reg BI. The FAQ also notes that not all communications with a prospective retail customer will rise to the level of a recommendation.
Disclosure, Care and Conflict of Interest Obligations
The FAQs address various disclosure, care and conflict of interest obligations under Reg BI. One FAQ explains that only in limited circumstances can an associated person of a broker-dealer provide oral disclosures or provide written disclosures after a recommendation is made without violating the obligation under Regulation Best Interest to provide written disclosures “prior to or at the time of the recommendation.” Here, the FAQ notes, among other things, that the SEC provided flexibility with respect to the “in writing” requirement of the disclosure obligation, as well as “with respect to the timing that disclosure is made, in certain circumstances, such as updating written disclosures orally to reflect facts not reasonably known at the time the written disclosure is provided.”
As to whether a broker-dealer can satisfy the disclosure obligation under Reg BI with the Form CRS, the short answer is no. The FAQ explains that whether the relationship summary or any existing disclosure by itself will satisfy the disclosure obligation in full would depend on the facts and circumstances, but in most instances, additional information will need to be provided.
Addressing whether the SEC mandated any particular mitigation methods, such as whether firms need to provide level-fee compensation or use neutral factors for differential compensation, the short answer again is no. “In lieu of mandating specific mitigation measures or a ‘one-size fits all’ approach, broker-dealers have flexibility to develop and tailor reasonably designed policies and procedures that include conflict mitigation measures, based on each firm’s circumstances,” the FAQ explains. It further notes that the Commission recognized that there are a number of different kinds of incentives and depending on the specific characteristics of an incentive, different levels and types of mitigation may be necessary.
Several FAQs address the intersection of the disclosure obligations with the Form CRS, and appear to build on an FAQ the SEC published in November 2019 addressing Form CRS.