Good to Know

The Security and Exchange Commission’s Regulation Best Interest (Reg BI) is aimed squarely at protecting the best interests of retail investors. A common issue that arises is exactly when Reg BI applies. The short answer is that Reg BI applies when a retail customer receives and subsequently uses a recommendation from a broker-dealer. Based upon recent posts by the SEC at https://www.sec.gov/tm/faq-regulation-best-interest#retail, this blog addresses the issue by answering 3 questions:

Who is a “retail customer?”

What is a “recommendation from a broker-dealer?”

What does “use a recommendation” mean? 

Retail Customer

A retail customeris simply “a natural person [legalese for a human with a heartbeat] or the legal representative of such natural person…” An example of a legal representative is a Trustee in a trust for which the retail customer is a beneficiary.

Recommendation from a Broker-Dealer

A recommendation should be broadly interpreted as a “call to action” related to securities or a securities account. 

  • For example, an explicit or, at times, implied suggestion to buy, sell or hold securities is generally a recommendation. A recommendation to adopt, continue or change an investment strategy is generally a “recommendation” as well.
  • Reg BI applies not to only to securities and strategies recommendations but to account recommendations as well. For example, an IRA rollover recommendation is generally a “recommendation” under the auspices of Reg BI.
  • A broker-dealer includes not only the registered individual(s), but any associates as well.  

Use a Recommendation

Be careful in assuming what “use” means.  A retail customer does not have to implement the recommendation to constitute “use.” A retail customer uses a recommendation when he or she “accepts or rejects the broker-dealer’s recommendation…”

Before we conclude, there is a key element missing so far: Compensation!  Counter-intuitively, broker-dealers can be subject to Reg BI in the absence of compensation if the retail customer:

  • Has an existing brokerage account with the broker-dealer, or
  • Opens a brokerage account with the broker-dealer.

As you might expect, a broker-dealer is subject to Reg BI if he or she receives compensation from the recommendation, even if the retail customer has no brokerage account with the broker-dealer. 

In this blog, we summarized when and to whom Reg BI applies. Stay tuned for our next blog – we will explain the “best interest” disclosures and duty of care required under Regulation Best Interest.

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be relied upon to provide compliance, legal, tax, investment or any other financial or regulatory advice.  There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.