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Reg BI Frequently Asked Questions

The Frequently Asked Questions below are taken directly from the Securities and Exchange Commission’s Regulation Best Interest and Form CRS FAQ pages. The below are FINRA’s best attempt to highlight the latest SEC FAQs, but additional FAQs may have been published that are not posted on this page. For the latest FAQs on Reg BI and Form CRS, please visit the SEC’s website.

SEC Frequently Asked Questions on Regulation Best Interest

Added August 4, 2020:

Q: Does Regulation Best Interest apply if a broker-dealer makes a recommendation of a securities transaction or investment strategy involving securities to a regulated financial services industry professional for his or her own account?

A: Yes. In the staff’s view, if a regulated financial services industry professional is acting in a personal capacity for his or her own account, the individual is considered a retail customer for purposes of Regulation Best Interest. The fact that the recipient of the recommendation is a regulated financial services industry professional would not excuse a firm from complying with Regulation Best Interest, because in this situation the individual would be a natural person receiving and using the recommendation for personal, family, or household purposes. (Posted August 4, 2020)

Q: I am a broker-dealer; if I am not also a registered investment adviser, may I use the term “adviser” or “advisor” in my firm’s “doing business as” or “marketing” name?

A: Generally, no. As noted above, the Commission presumes that the use of the terms “adviser” or “advisor” in a name or title by (i) a broker-dealer that is not also registered as an investment adviser or (ii) an associated person of a broker-dealer who is not also a supervised person of an investment adviser is a violation of the Disclosure Obligation under Regulation Best Interest. In the staff’s view, this presumption applies to a firm’s “doing business as” or “marketing” name, as well as a firm’s legal name. (Posted August 4, 2020)

Q: I am a broker-dealer that is dually registered as an investment adviser. Can my firm’s financial professionals, including those who are not also supervised persons of an investment adviser, use or distribute firm materials that generally describe our firm’s financial professionals as “financial advisors” or by another general title using the term “adviser” or “advisor” (e.g., “Our financial advisors…” or “Talk to your financial advisor about…”)?

A: Generally, yes. In the staff’s view, where a dually-registered broker-dealer uses or distributes firm material, such as marketing material that generally refers to financial professionals using the terms “advisers” or “advisors,” such language, by itself, would not presumptively violate the capacity disclosure requirement under the Disclosure Obligation. This would be the case whether or not the financial professional using the firm’s materials is also a supervised person of an investment adviser.

However, the staff reminds broker-dealers that in order to satisfy the Disclosure Obligation 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. This obligation applies to both the broker-dealer and to associated persons of the broker-dealer. Accordingly, additional disclosures to identify capacity may be necessary for the firm and the financial professional using such materials when making a recommendation. For example, in a situation where such firm materials are used by a financial professional who is not also a supervised person of an investment adviser, additional disclosures would be necessary to identify the capacity in which the financial professional is acting when making the recommendation. Similarly, a financial professional who is not also a supervised person of an investment adviser would not be permitted to use his or her own materials that refer to himself or herself as an “adviser” or “advisor” notwithstanding his or her firm’s registration status. (Posted August 4, 2020)

Q: I am a standalone broker-dealer (I am not dually registered as an investment adviser). Some of my firm’s registered representatives are also supervised persons of a registered investment adviser (either affiliated with my firm or not affiliated with my firm). Can my firm’s financial professionals use or distribute materials prepared by my firm that generally describe my firm’s financial professionals as “financial advisors” or by another general title using the term “adviser” or “advisor” (e.g., “Our financial advisors…” or “Talk to your financial advisor about…”)?

A: Generally, no. In the staff’s view, where a standalone broker-dealer uses or distributes firm materials, such as marketing materials that generally refer to its financial professionals using the terms “advisers” or “advisors,” such disclosures would presumptively violate the capacity disclosure requirement under the Disclosure Obligation. However, where a financial professional is also a supervised person of an investment adviser, such individual may use his or her own materials (or materials prepared by the registered investment adviser) that refer to himself or herself as an “adviser” or “advisor.” (Posted August 4, 2020)

Q: Can a broker-dealer, whether standalone or dually registered as an investment adviser, use or distribute issuer-prepared marketing and disclosure materials if the issuer-prepared materials generally describe financial professionals collectively as “financial advisors” or by another general title using the term “adviser” or “advisor”?

A: Generally, yes. In the staff’s view, where a broker-dealer uses or distributes issuer-prepared materials, such as a prospectus that generally refers to financial professionals using the terms “advisers” or “advisors,” such disclosure, by itself, would not presumptively violate the capacity disclosure requirement under the Disclosure Obligation. This would be the case regardless of whether the broker-dealer is dually registered or the associated persons of the broker-dealer are also supervised persons of an investment adviser.

However, the staff reminds broker-dealers that in order to satisfy the Disclosure Obligation 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. This obligation applies to both the broker-dealer and to associated persons of the broker-dealer. Accordingly, additional disclosures to identify capacity may be necessary for the firm and the financial professional using the issuer materials when making a recommendation. For example, in a situation where such materials are used by a financial professional who is not also a supervised person of an investment adviser, additional disclosures would be necessary to identify the capacity in which the financial professional is acting when making the recommendation. (Posted August 4, 2020)

Q: I am an associated person of a broker-dealer and also offer services on behalf of a bank (“dual-hatted broker-dealer-bank employee”). When acting on behalf of the bank, would the use of the term “adviser” or “advisor” in my title or “doing business as” name presumptively violate the capacity disclosure requirement of Regulation Best Interest?

A: No. The Commission stated that Regulation Best Interest applies only in the context of a brokerage relationship with a brokerage customer, and specifically, when a broker-dealer is making a recommendation in the capacity of a broker-dealer. In the staff’s view, Regulation Best Interest would not apply when a dual-hatted broker-dealer-bank employee is acting in the capacity of a bank employee.

However, where a dual-hatted broker-dealer-bank employee is providing a recommendation to a retail customer in his or her broker-dealer capacity, in the staff’s view, it would be a presumptive violation of the Disclosure Obligation to use the name or title “adviser” or “advisor” unless such individual is also a supervised person of an investment adviser. (Posted August 4, 2020)

Q: I am a dually registered financial professional. My customer holds securities in a brokerage account, for which she has paid transaction-based compensation, including commissions, markups, and upfront sales loads. In my broker-dealer capacity, may I recommend that she roll over or transfer such assets from her brokerage account to an advisory account where she will be charged an ongoing asset-under-management fee? What factors should I consider?

A: It depends. Under Regulation Best Interest, you must have 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 your financial or other interest ahead of the interest of the retail customer. In doing so, you must weigh the potential risks, rewards, and costs of a particular security or investment strategy, in light of the particular retail customer’s investment profile.[4]

In the staff’s view, prior to recommending a retail customer roll over or transfer assets, such as from a brokerage to an advisory account, you should take into consideration, among other factors, the potential risks, rewards, and costs associated with the transfer or rollover of the securities, including whether the transfer or rollover would require a sale of securities. This would include consideration of any fees and costs related to any such sale of securities or to the rollover or transfer of assets, such as deferred sales charges or liquidation costs. Moreover, you would need to consider the potential risks, rewards, and costs associated with the advisory account (including, for example, the projected cost to the retail customer of the account), and weigh such factors in light of the particular retail customer’s investment profile, as well as other relevant factors.

For example, where a retail customer holds class A mutual fund shares, the sale of such shares could generate a taxable event, and could result in the forfeit of certain benefits, such as rights of accumulation or rights of exchange. In addition, class A shares typically charge a front-end sales load, but tend to have a lower 12b-1 fee and annual expenses than certain other mutual fund share classes. You should understand these potential risks, rewards, and costs when weighing whether a recommendation to roll over or transfer class A mutual fund shares is in the best interest of the retail customer.

Finally, where a retail customer holds a variety of investments, or prefers differing levels of services (e.g., both episodic recommendations from a broker-dealer and continuous advisory services including discretionary asset management from an investment adviser), it may be in the retail customer’s best interest to recommend both a brokerage and an advisory account. (Posted August 4, 2020)

Q: I am a dually registered financial professional and I offer both advisory and brokerage accounts. When I first meet with a potential customer and begin to gather her or his personal and financial background information, how do I know in which capacity I am acting as I evaluate which type of account to recommend? Would the ultimate account-type recommendation dictate my capacity at the time of the evaluation?

A: Determining the capacity in which a dual-registrant is making a recommendation is a facts and circumstances test, with no one factor being determinative, but the Commission considers, among other factors, 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. Regulation Best Interest would not apply to investment advice provided to a retail customer by a dual-registrant when acting in the capacity of an investment adviser, even if the retail customer has a brokerage relationship with the dual-registrant or the dual registrant executes the transaction in its brokerage capacity. Similarly, a dual registrant is 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 Investment Advisers Act.

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, in the staff’s view, the financial professional should assume that both Regulation Best Interest and the Investment Advisers Act would apply, and the account recommendation generally should be evaluated under both Regulation Best Interest and the Investment Advisers Act. (Posted August 4, 2020)

SEC Frequently Asked Questions on Form CRS

Added March 5, 2021:

Q: Firm A is a SEC-registered broker-dealer and a state-registered investment adviser. Firm B is a SEC-registered broker-dealer that also provides investment advisory services to retail investors through its affiliated state-registered investment adviser. May Firm A prepare and file a single relationship summary as a “dual registrant” and/or may Firm B prepare and file a single relationship summary as an “affiliate” under Form CRS Instruction 5?

A: No. Firm A may not prepare and file a single relationship summary as a “dual registrant” because, as a SEC-registered broker-dealer and a state-registered investment adviser, the firm does not meet the definition of a “dual registrant” in the Form CRS Instructions. See General Instruction 11.C. to Form CRS. In addition, while Firm B’s affiliated state-registered investment adviser may meet the definition of an “affiliate” in the Form CRS Instructions, here the affiliate does not have a separate Form CRS filing and delivery obligation. As a result, Firm B may not prepare and file a single relationship summary with its affiliated state-registered investment adviser. In these scenarios, Firms A and B must each prepare and file a relationship summary covering their brokerage services that does not exceed two pages. See General Instruction 1.C. to Form CRS. Affiliates should file a single relationship summary only where each affiliated entity has an SEC obligation to file.

Firms A and B are each permitted, however, to acknowledge other financial services that it provides in addition to its services as a broker-dealer registered with the SEC, including any state-registered investment advisory services, so long as the presentation of these services does not obscure or impede understanding of the information that must be included in the relationship summary. See General Instruction 5.C. to Form CRS. Firms may also include a means of facilitating access (e.g., cross-references or hyperlinks) to additional information about these services. (Posted March 5, 2021)

Q: My firm intends to make material changes to its relationship summary, and to re-file pursuant to General Instruction 8.A. (including the required exhibit highlighting changes). With respect to these changes, what are my firm’s obligations to retail investors who are existing clients or customers?

A: Pursuant to General Instruction 8.B., you must communicate these material changes to retail investors who are existing clients or customers within 60 days after the updates are required to be made and without charge. You may either communicate the material changes by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor.

If you choose to communicate the changes by delivering an amended relationship summary, you must highlight the most recent changes (pursuant to General Instruction 8.C.) by, for example, marking the revised text or including a summary of material changes. In the staff’s view, if a firm chooses to mark the revised text, the most recent changes should be highlighted in a manner that is readily distinguishable from any other text in the relationship summary. The additional disclosure showing revised text or summarizing the material changes must be attached as an exhibit to the unmarked amended relationship summary. See General Instruction 8.C. Further, in the staff’s view, for purposes of General Instruction 8.B., if you are a dual registrant or a firm with an affiliate that prepares separate relationship summaries, and you choose to communicate the changes in a relationship summary by delivering an amended relationship summary, you do not need to also deliver at the same time your firm’s or your affiliate’s other previously delivered relationship summary (that may otherwise be required in accordance with General Instruction 5), provided the other relationship summary has not become materially inaccurate.

If you choose to communicate the information through another disclosure, that disclosure must be delivered to the retail investor. Merely providing notice of or access to another disclosure or the relationship summary would not satisfy this requirement. For example, if you are an investment adviser, instead of delivering the amended relationship summary, you could communicate a material change to information contained in the relationship summary to a retail investor by delivering (within 60 days after the relationship summary changes are required to be made) an amended Form ADV brochure or Form ADV summary of material changes that also contains the updated information. As another example, if you intend to deliver another disclosure (e.g., account statement) to retail investors who are existing clients or customers within the 60 day period, you may communicate the material changes with or through that disclosure (e.g., by including a cover sheet summarizing the material changes).

In addition, the current version of the relationship summary must be posted on the firm’s website (if the firm has one) pursuant to General Instruction 10, and to the extent delivery is triggered under General Instructions 7 and 9, firms must deliver their current relationship summaries to retail investors who are prospective, new or existing customers or clients. Investment advisers and broker-dealers must also maintain copies of all versions of their relationship summaries. (Posted March 5, 2021)

Q: My firm intends to make only non-material changes to its relationship summary. Under General Instruction 8, is my firm required to file the amended relationship summary and/or communicate these non-material changes to retail investors who are existing clients or customers?

A: No. Pursuant to General Instruction 8.A., a firm must update its relationship summary and file it within 30 days whenever any information in the relationship summary becomes materially inaccurate, which would include information that is materially outdated or materially incomplete. If a firm makes only non-material changes to its relationship summary that do not render any information in the filed version of the relationship summary materially inaccurate, the firm is not required to file the amended relationship summary. Moreover, the requirements relating to communicating and highlighting the changes in General Instructions 8.B. and 8.C. only apply when a firm is required to update its relationship summary pursuant to General Instruction 8.A. (i.e., whenever any information in the relationship summary becomes materially inaccurate). Accordingly, the firm is not required to communicate the non-material changes to retail investors and is not required to attach an exhibit to its relationship summary. However, a firm may still choose to file the amended relationship summary and communicate non-material changes to retail investors who are existing clients and customers.

In addition, the current version of the relationship summary must be posted on the firm’s website (if the firm has one) pursuant to General Instruction 10, and to the extent delivery is triggered under General Instructions 7 and 9, firms must deliver their current relationship summaries to retail investors who are prospective, new or existing customers or clients. Investment advisers and broker-dealers must also maintain copies of all versions of their relationship summaries, including versions incorporating non-material changes. (Posted March 5, 2021)