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In June 2019, the SEC adopted Regulation Best Interest. The
Regulation requires broker-dealers (and natural persons associated with
broker-dealers) to act in the best interest of their retail customers in making
a recommendation of any securities transaction or investment strategy involving
securities. Since the rule’s promulgation, there have been several questions
relating to compliance with Regulation Best Interest. Accordingly, within the
past few months, and as recent as February 2020, the U.S. Securities and
Exchange Commission (SEC) Division of Trading and Markets released answers to
Frequently Asked Questions (FAQs) relating to compliance with Regulation Best
Interest.
The FAQs covered topics ranging from what is a
“recommendation” to obligated disclosures broker-dealers are required to make.
All of the answers to the FAQs provide relevant and insightful information to
broker-dealers; however, the following should be of noted importance. The Division of Trading and Markets has made it clear that Regulation Best
Interest applies to limited purpose broker-dealers- i.e., broker-dealers that
make recommendations of private offerings to accredited investors. “Whether a broker-dealer engages in limited activity does not
dictate whether or not Regulation Best Interest applies. Regulation Best
Interest applies to broker-dealers that make recommendations of any securities
transaction or investment strategy involving securities to retail customers.”
The Division of Trading and Markets also highlighted the fact that
customers may not waive or agree to waive the protections of Regulation Best
Interest. As it relates to a firm’s obligation to build new systems of control
in order to comply with Regulation Best Interest, the Division of Trading and
Markets stated, “Broker-dealers are currently subject to
supervisory obligations under federal securities laws and regulations, as well
as applicable self-regulatory organization rules, and broker-dealers could choose
to satisfy the Compliance Obligation by adjusting/building upon their current
systems of supervision and compliance, as opposed to creating entirely new
systems.”
We encourage our clients to review the Frequently Asked Questions on Regulation Best Interest. We recommend our brokerage firm clients to have policies and procedures in place to ensure compliance with Regulation Best Interest.