Reg BI Frequently Asked Questions

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)

Added March 30, 2022:

Fiduciary and Fiduciary Duty

Q: May an investment adviser use the terms “fiduciary” or “fiduciary duty” in its Form CRS?

A: Yes, but only to the extent permitted by the Form CRS Instructions and the applicable item. The staff reminds firms that Form CRS “is designed to be a short and accessible disclosure for retail investors that helps them to compare information about firms’ brokerage and/or investment advisory offerings.”¹ The staff also reminds firms that “the relationship summary is designed to serve as disclosure, rather than marketing material.”²

For certain items, the Instructions provide that firms must use the prescribed language without modification, and therefore an investment adviser cannot add the term “fiduciary” to prescribed language. For example, the Instructions require firms to provide a consistent articulation of their required legal obligations using the prescribed statement in Item 3.B.(i) to minimize investor confusion; the Instructions do not permit firms to state their required standard of conduct using their own wording.³

For items without prescribed language, the staff cautions against an investment adviser using the terms “fiduciary” or “fiduciary duty” where doing so would be extraneous or unresponsive to the particular item⁴ or would involve, or suggest, exaggerated or unsubstantiated claims, and any use of the terms must be accurate and not misleading. For example, in the staff’s view, embellishing factual statements about the capacity or services of an investment professional or firm with phrases such as “an investment adviser who is held to the fiduciary standard,” is likely to be inappropriate. Similarly, the staff cautions against describing the fiduciary duty as a “higher standard” or the “highest standard.”⁵ In addition, it is likely misleading and non-responsive for an investment adviser to represent that the fiduciary duty alone mitigates or eliminates conflicts of interest.⁶ (Posted March 30, 2022)