The Securities and Exchange Commission’s Regulation Best Interest as well as the Form CRS requirements apply to accredited investors, according to updated FAQ guidance issued by the agency on Tuesday.
In its updated FAQ on Reg BI, the Divisions of Investment Management and Trading and Markets state that Reg BI does apply to limited purpose broker-dealers that make recommendations of private offerings to accredited investors.
The division heads stated that Reg BI applies in this case “if that accredited investor is a ‘retail customer’ as defined in the rule.”
The definition of “retail customer,” the agency says, “does not exclude high-net-worth natural persons and natural persons that are accredited investors.”
Whether a broker-dealer engages in limited activity does not dictate whether or not Regulation Best Interest applies.” Reg BI “applies to broker-dealers that make recommendations of any securities transaction or investment strategy involving securities to retail customers,” according to the FAQ.
RIAs and BDs must apply Reg BI and send Form CRS to accredited investors “because the definition of retail investor does not exclude high-net-worth natural persons and accredited investors,” Cipperman Compliance Services said in commenting on the updated FAQs.
The other FAQ addresses delivery of Form CRS for dually registered firms.
One question asks: “If a retail investor client of a dually registered firm elects to convert an investment advisory account to a brokerage account, must the firm deliver a new relationship summary to the retail investor? The firm already provided the retail investor with a relationship summary describing both its brokerage and advisory services when the retail investor opened the account.”
The SEC’s answer: “Yes, the firm would have to deliver a new relationship summary. Opening a new account that is different from the retail investor’s existing account triggers delivery of the relationship summary.”
Another question addresses registration changes:
“Our firm is a state-registered investment advisor that will be transitioning to SEC registration after June 30, 2020. We understand that we will be required to include our relationship summary as part of our application for registration with the SEC. When will we be required to deliver our relationship summary to our existing retail investor clients?”
The SEC’s answer: “The relationship summary delivery requirements in the Form CRS Instructions and under Advisers Act rule 204-5 apply only to investment advisors that are registered with the Commission and therefore do not apply until the Commission grants registration.”
The FAQ also address several affiliate relationships, generally allowing the use of a single Form CRS so long as advisors can fit all the required disclosure in four pages, Cipperman explained. “Certain investor education — general information about retirement planning, minimum distributions — would not be considered a recommendation.”
— Related on ThinkAdvisor: