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?
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.