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Where a financial professional who is dually registered i. In the case of an account recommendation by a financial professional who is only registered as an associated person of broker-dealer regardless of whether that broker-dealer entity is a dual-registrant or affiliated with an investment adviser , Regulation Best Interest will apply to the recommendation. Further, the associated person can only recommend a brokerage account that the broker-dealer offers when the associated person has a reasonable basis to believe that the recommended brokerage account is in the best interest of the retail customer and the broker-dealer otherwise complies with Regulation Best Interest.

Regulation Best Interest would apply to account recommendations by the dual-registrant firm, and consistent with the Conflict of Interest Obligation, the firm would need to, among other things, establish, maintain and enforce policies and procedures to identify, disclose, and mitigate, any incentives for an associated person of the broker-dealer to place the interest of the firm or the associated person ahead of the interests of the retail customer. In the discussion of the Care Obligation below, we discuss how a broker-dealer and associated persons of a broker-dealer can make recommendations of securities account types, including recommendations to open an IRA or to roll over assets into an IRA, in the best interest of the retail customer.

The Proposing Release stated that Regulation Best Interest would apply to any securities transaction or investment strategy involving securities, including explicit recommendations to hold a security or regarding the manner in which it is to be purchased or sold to retail customers. Several commenters agreed that broker-dealers should be able to contract with retail customers for additional services and be able to expand the relationship on their own terms, while other commenters recommended that a duty to monitor apply to broker-dealers depending on the facts and circumstances.

We are confirming that, consistent with existing broker-dealer regulation, Regulation Best Interest will apply to explicit recommendations to hold a security or securities. We agree, however, with commenters that Regulation Best Interest should apply to any recommendations that result from the account monitoring services that a broker-dealer agrees to provide. This is the case even in instances where the broker-dealer does not communicate any recommendation to the retail customer.

In other words, unless the broker-dealer has agreed to provide account monitoring services as described, Regulation Best Interest would only apply to explicit— and not to implicit —hold recommendations regarding security positions in an account. We recognize that a broker-dealer may voluntarily, and without any agreement with the customer, review the holdings in a retail customer's account for the purpose of determining whether to provide a recommendation to the customer.

We view this voluntary review—and any subsequent recommendation to the customer—as in connection with and reasonably related to the broker-dealer's primary business of effecting securities transactions. Furthermore, based on comments, our position is that recommendations to retail customers regarding retirement accounts would also be subject to Regulation Best Interest where they involve securities transactions or investment strategies involving securities.

We agree with commenters that recommendations to retail customers to take distributions from proceeds of specific securities or to take in-service loans from an employer-sponsored plan are recommendations of a securities transaction, as they would involve a recommendation to sell a security. In proposing the definition, we intended to exclude recommendations Start Printed Page related to commercial or business purposes but for the definition to remain sufficiently broad to capture recommendations related to the various reasons retail customers may invest, such as saving for retirement, education expenses and other savings purposes.

Vermont Securities Regulations

As such, the proposed definition applied to any persons who receive a recommendation from a broker or dealer or a natural person who is an associated person of a broker or dealer, provided that the recommendation is primarily for personal, family or household purposes. In the case of dual-registrants, the proposed definition was intended to apply only to recommendations made by broker-dealers in their brokerage capacity, based on a facts and circumstances analysis and consistent with existing guidance.

The revised definition shifts the focus to natural persons, as opposed to any persons, but otherwise it is adopted largely as proposed. Furthermore, we are providing guidance on who would be considered to be the legal representative of a natural person for purposes of this definition. Commenters generally suggested that the definition of retail customer be modified to focus on natural persons. Conversely, a few commenters believed that Regulation Best Interest should apply to both retail and institutional customers.

We believe this change and clarification provides more certainty that institutions and certain professional fiduciaries are not covered for purposes of Regulation Best Interest. It would also retain, however, coverage of certain legal entities i. While the Commission recognizes commenters' concerns regarding compliance costs and burdens if the definition of retail customer does not align with FINRA's exclusion of certain institutional accounts and institutional investors, we have decided not to align our definition with FINRA's exclusion because we believe conflicted recommendations can also result in harm to high net-worth individuals.

In capturing non-professional legal representatives within the definition of retail customer, we are providing the protections of Regulation Best Interest to non-professional persons who are acting on behalf of natural persons but who are not regulated financial services industry professionals retained by natural persons to exercise independent professional judgment, such as registered investment advisers and broker-dealers, corporate fiduciaries e. Accordingly, such non-professional legal representatives would not include regulated financial industry professionals.

We believe this responds to commenters who stated that it should not be necessary to provide the protections of Regulation Best Interest to regulated professionals. Similarly, a plan participant receiving recommendations for the participant's individual account held in a k plan or other workplace retirement plan would be a retail customer for purposes of Regulation Best Interest.


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The Commission acknowledges concerns from some commenters that workplace retirement plans and their representatives e. We note, however, that some plan representatives may participate under their employer's workplace plan, for example, in the case of a workplace IRA or other workplace retirement plan that is established and maintained by a sole proprietor or other self-employed individual that includes one or more employees in addition to the plan representative.

To the extent that a plan representative who decides service arrangements for a workplace retirement plan is a sole proprietor or other self-employed individual who will participate in the plan, the plan representative would be a retail customer for purposes of Regulation Best Interest to the extent the sole proprietor or self-employed individual receives recommendations directly from a broker-dealer primarily for personal, family or household purposes.

Regulation Best Interest applies to a retail customer that both receives a recommendation of any securities transaction or investment strategy involving securities by a broker-dealer and that uses that recommendation primarily for personal, family, or household purposes, and not simply those recommendations for which a broker-dealer receives compensation. Whether the recommendation complies with Regulation Best Interest will be evaluated based on the circumstances that existed at the time the recommendation was made to the retail customer. Accordingly, broker-dealers should carefully consider the extent to which associated persons can make recommendations to prospective retail customers i.

The Commission agrees with commenters that using a similar definition would provide consistency in the protections, and ease the compliance burden, of the package of rulemakings. Therefore, the definitions in Form CRS and Regulation Best Interest have been revised to generally conform to each other, consistent with our respective goals in each of these rulemakings.

While the definitions have generally been harmonized across the package of rulemakings, [ ] they differ to reflect differences between the Relationship Summary delivery requirement and the obligations of broker-dealers under Regulation Best Interest, including that the Relationship Summary is required whether or not there is a recommendation and covers any prospective and existing clients and customers i. This distinction reflects differences between the point in time the Relationship Summary is delivered to an investor and when the obligations of broker-dealers pursuant to Regulation Best Interest attach.

In the Proposing Release, 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 particular, for dual-registrants for purposes of this section, a broker-dealer that is dually registered as an investment adviser with the Commission , the obligations associated with Regulation Best Interest were intended to apply only when they are acting in the capacity as a broker-dealer.

Many commenters requested that the Commission clarify the treatment of dual-registrants and what is expected when offering products in both types of accounts. In response, the Commission is reaffirming the guidance provided in the proposal and providing further clarification on when and how Regulation Best Interest would apply to dual-registrants. As stated in the proposal, 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.

While we acknowledge that some commenters believe all dual-registrants Start Printed Page should be held to a fiduciary standard, for the reasons discussed in Section II. A, the Commission believes that Regulation Best Interest enhances the obligations that apply when a broker-dealer makes a recommendation to a retail customer by drawing from key principles underlying the fiduciary obligation that applies to investment advisers under the Advisers Act, while being tailored to the broker-dealer model.

As stated in the proposal, 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 or client the capacity in which it was acting. We note, however, that the dually registered financial professional would need to comply with the Advisers Act as well as the requirements with respect to Form CRS for the firm.

I. INTRODUCTION

Regulation Best Interest would apply if the financial professional in her brokerage capacity disclosed pursuant to the Disclosure Obligation , provides a recommendation of a securities transaction or investment strategy involving securities to the family in the course of the holistic review. As discussed above, we have determined to retain the overall structure and scope of the proposed rule, but are modifying and clarifying the component obligations that a broker-dealer must satisfy in order to meet the General Obligation. As adopted, the General Obligation is satisfied only if the broker-dealer complies with four specified component obligations: 1 The Disclosure Obligation; 2 the Care Obligation; 3 the Conflict of Interest Obligation; and 4 the Compliance Obligation.

Each of these component obligations is discussed below.

Federal Register :: Regulation Best Interest: The Broker-Dealer Standard of Conduct

Whether a broker-dealer has acted in the retail customer's best interest under the General Obligation will turn on an objective assessment of the facts and circumstances of how these specific components of Regulation Best Interest are satisfied at the time that the recommendation is made and not in hindsight. The specific component obligations of Regulation Best Interest are mandatory, and failure to comply with any of the components would violate Regulation Best Interest. As stated in the Proposing Release, we understand that broker-dealers typically provide information about their services and accounts, which may include disclosures concerning the broker-dealer's capacity, fees, services, and conflicts, on their firm websites and in their account opening agreements.

We solicited comment on the Disclosure Obligation and commenters addressed several aspects of this proposed obligation, including the interpretation of each required element, as discussed in the relevant sections below. The Disclosure Obligation requires the disclosure of all material facts related to the scope and terms of the relationship with the retail customer. The material facts identified in Regulation Best Interest are the minimum of what must be disclosed.

Solving Private Equity's Broker-Dealer Compliance Challenge

Under this approach, all conflicts of interest as so defined will be covered by Regulation Best Interest and thus, will be subject to the Conflict of Interest Obligation described below. As discussed above, we are adopting a new set of disclosure requirements designed to reduce retail investor confusion in the marketplace for brokerage and advisory services and to assist retail investors with the process of deciding whether to engage a particular firm or financial professional and whether to establish an investment advisory or brokerage relationship.

As a general matter, the Relationship Summary reflects an initial layer of disclosure, with the Disclosure Obligation reflecting more specific and additional, detailed layers of disclosure. In addition, we believe the Relationship Summary and Disclosure Obligation will improve the quality and consistency of disclosures and thus: 1 Reduce the information asymmetry that may exist between a retail customer and their broker-dealer, and 2 facilitate customer comparisons of different broker-dealers which we expect will, in turn, increase competition among broker-dealers, including with respect to fees and costs.

Though there are disclosures in the Relationship Summary that could satisfy the Disclosure Obligation, in most instances the Relationship Summary will not be sufficient. However, we encourage broker-dealers, in deciding whether to rely on such an existing disclosure document or whether to include or repeat information from existing disclosures, to consider the usefulness and ease of understanding for retail customers of any existing disclosure document. As discussed in more detail below, a number of commenters highlighted practical difficulties associated with delivering disclosure either in writing, or prior to or at the time of a recommendation in some instances.

For example, a broker-dealer may need to supplement, clarify or update written disclosure it has previously made before Start Printed Page or at the time it provides a customer with a recommendation. As we stated in the Proposing Release, we recognized that broker-dealers may provide recommendations by telephone and may need to offer clarifying disclosure orally in some instances subject to certain conditions, such as a dual-registrant informing a retail customer of the capacity in which the dual-registrant is acting in conjunction with a recommendation.

We stated that a broker-dealer could orally clarify the capacity in which it is acting at the time of the recommendation if it had previously provided written disclosure to the retail customer beforehand disclosing its capacity as well as the method it planned to use to clarify its capacity at the time of the recommendation.

crafelescor.cf Similarly, although Regulation Best Interest requires a broker-dealer to disclose, prior to or at the time of a recommendation, all material facts relating to the scope and terms of the relationship with the retail customer and relating to conflicts of interest that are associated with the recommendation, we recognize that in some instances a broker-dealer may not have all the material facts at the time of the recommendation, or that such disclosure is provided to the retail customer pursuant to an existing regulatory obligation, such as the delivery of a product prospectus or a trade confirmation, after the execution of the trade.

We noted also that whether there is sufficient disclosure in both the initial disclosure and any subsequent disclosure would depend on the facts and circumstances. We continue to believe that some flexibility with respect to the provision by broker-dealers of written and oral disclosure, as well as with respect to the timing that disclosure is made, is appropriate in certain circumstances, such as when a broker-dealer updates its written disclosures orally in order to reflect facts not reasonably known at the time the written disclosure is provided.

In such circumstances, a broker-dealer may satisfy its Disclosure Obligation by making supplemental oral disclosure not later than the time of the recommendation, provided that the broker-dealer maintains a record of the fact that oral disclosure was provided to the retail customer. Before supplementing, clarifying or updating written disclosures in the limited circumstances described above, broker-dealers must provide an initial disclosure in writing that identifies the material fact and describes the process through which such fact may be supplemented, clarified or updated.

For example, with regard to product-level fees, a broker-dealer could provide an initial standardized disclosure of product-level fees generally e. Or, a broker-dealer could disclose that its associated persons may have conflicts of interest beyond than those disclosed by the broker-dealer, and that associated persons will disclose, where appropriate, any additional material conflicts of interest not later than the time of a recommendation, and that any such disclosure will be made orally.


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We believe it is in the public interest and consistent with the protection of investors to permit such flexibility in the delivery of information pursuant to the Disclosure Obligation. Providing retail customers written summary information about material facts relating to a recommendation and indicating that additional information will be forthcoming, the point at which the additional information will be delivered, and the method by which it will be conveyed, highlights for retail customers a useful summary of information while allowing for the practical realities of the process by which securities recommendations are made and transactions are executed and leaving longstanding existing disclosure regimes, particularly those relating to product issuer disclosure, undisturbed.

Further, the requirements under Regulation Best Interest that particular information be disclosed is not determinative of a broker-dealer or associated person's other potential liabilities under the general antifraud provisions of the federal securities laws for failure to disclose material information to a customer at the time of a recommendation. The Disclosure Obligation applies to a broker, dealer, or natural person who is an associated person of a broker or dealer.

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