SEC Division of Trading and Markets Issues Interpretive Guidance on Regulation Best Interest

The setting and location of a communication have no bearing on whether a communication is subject to Regulation Best Interest. Rather, the determination hinges on whether the associated person makes a recommendation to a retail customer. This FAQ notes that the question of whether a communication is a recommendation should be determined by reference to precedent under the anti-fraud provisions of the federal securities laws and the way in which those provisions have been applied under FINRA’s rules. Under this existing framework, factors to consider include:

• whether the communication reasonably would be viewed as a “call to action”; or
• the extent to which the communication is tailored to a specific retail customer or group of retail customers.

Example: This FAQ states that the following communication in this context, absent other factors, would not be considered a recommendation: “I have been working with our mutual friend, Bob, for fifteen years, helping him to invest for his kids’ college tuition and for retirement. I would love to talk with you about the types of services my firm offers, and how I could help you meet your goals. Here is my business card. Please give me a call on Monday so that we can discuss.”

No. As stated above, the determination hinges on whether the associated person makes a recommendation to a retail customer. However, this FAQ notes that in this case, given that the associated person is attempting to persuade customers to move their accounts to the associated person’s new firm, there exists a significant possibility that the communication will be a “call to action” constituting a recommendation subject to Regulation Best Interest.

Example: This FAQ provides the following example of a communication that, absent other factors, the staff would not consider a recommendation: “I wanted to let you know that I am leaving Firm A after today. As of Monday, I will be joining Firm B. It has been really great working with you all of these years, and I would love to continue our relationship. I will give you a call next week to tell you more about Firm B and discuss what it has to offer.”

Generally, no, provided that the associated person does not also make a recommendation to the retail customer.

Examples: This FAQ provides the following examples of communications in this context that, absent other factors, the staff would view as “education” and not a “recommendation”:

• informing a retail customer that the retail customer may make a cash contribution to an IRA in an amount up to the annual limit;
• providing a company’s retirement plan options to the retail customer; and
• informing a retail customer that he or she must take a required minimum distribution under the Internal Revenue Code.

Only in limited circumstances. Regulation Best Interest generally requires disclosure in writing to the retail customer of all material facts relating to (i) the scope and terms of the relationship with the retail customer and (ii) conflicts of interest associated with the recommendation.

However, the SEC has provided a degree of flexibility with respect to the “in writing” and the timing requirements by allowing oral and/or subsequent communications in certain circumstances to supplement, clarify or update a previous written communication, provided that (i) the associated person has provided the retail customer an initial, written disclosure identifying the relevant material fact and describing the process through which the fact may be supplemented, clarified or updated and (ii) the associated person’s firm records (and maintains record of) the oral disclosure.

Examples: This FAQ provides the following examples of permissible oral and/or subsequent communications (in each case, subject to the conditions set forth in the previous paragraph):

• The associated person may provide oral updates to written disclosures to reflect facts the associated person reasonably did not know when the associated person first provided the written disclosure; and
• Where existing regulations permit disclosure subsequent to a recommendation (e.g., trade confirmations and prospectus delivery), the written disclosure may be provided to the retail customer subsequent to the recommendation.

No. Regulation Best Interest does not require that a broker-dealer establish differential compensation based on neutral factors. Instead, the broker-dealer has flexibility to develop and tailor reasonably designed policies and procedures that include conflict mitigation measures based on the applicable firm’s circumstances.

Examples: The SEC provided a non-exhaustive list of examples of practices that a broker-dealer could adopt as mitigation methods for the firm to comply with its Conflict of Interest Obligation, including:

• avoiding compensation thresholds that disproportionately increase compensation through incremental increases in sales;
• minimizing compensation incentives for employees to favor one type of account or product over another, for example, by establishing differential compensation based on neutral factors;
• eliminating compensation incentives within comparable product lines by, for example, capping the credit that an associated person may receive across mutual funds or other comparable products across providers;
• implementing supervisory procedures to monitor recommendations that (i) are near compensation thresholds, (ii) are near thresholds for firm recognition, (iii) involve higher compensating products, proprietary products or transactions in a principal capacity or (iv) involve the roll over or transfer of assets from one type of account or product class to another;
• adjusting compensation for associated persons who fail to adequately manage conflicts of interest; and
• limiting the types of retail customers to whom a product, transaction, or strategy may be recommended.