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.