The Securities and Exchange Commission requires that any broker-dealer (firm) and their associated persons (RRs) must be acting in the retail customer’s best interest at the time of the recommendation and must not place their own financial interests above the customer’s interest.
To comply with Reg BI, four obligations to the customer must be met: (i) the Disclosure Obligation; (ii) the Care Obligation; (ii) the Conflict of Interest Obligation and (iv) the Compliance Obligation. See the SEC’s Small Entity Guide.
The Disclosure Obligation requires firms and RRs to provide in writing “full and fair disclosure” of certain material facts to retail customers before or at the time a recommendation is made.
Timing and Documentation of the Disclosures
Written disclosures must be made at the time a new customer account is opened or at the time of any new recommendation for existing customers. Oral disclosures are specifically limited to providing a customer an update of information that was not known or knowable at the time of the recommendation.
To satisfy the Disclosure Obligation, the firm must keep a written record of any after-the-fact oral update disclosures. It is imperative for RRs to keep detailed notes or records of any oral communications with customers providing them with updates related to their investments, and have policies in place regarding oral update disclosures. Firms should provide RRs with training specifically related to documenting any after-the-fact discussions regarding a recommendation. Documentation is key to demonstrating compliance.
What Must Be Disclosed
Any material fact must be disclosed. The SEC advised of two main categories of material facts that must be disclosed: (1) facts relating to the “scope and terms of the relationship with the retail customer” and (2) facts relating to “conflicts of interest that are associated with the recommendation.”
What is considered a material fact for Reg BI is the same objective materiality standard that has long been recognized in federal securities law. To satisfy the requirement, customers should be given sufficient information to make a fully informed decision regarding the RR’s recommendation.
At a minimum, disclosures relating to the “scope and terms of the relationship with the retail customer” include:
The capacity in which the firm or RR is acting. A firm that is not dually registered will likely be able to satisfy this disclosure requirement in the Form CRS. However, RRs of dually registered firms who do not offer advisory services must disclose that they are only acting as an associated person of a firm. If the firm is not dually registered, using the term “advisor” or “adviser” is presumed to be a violation of the Disclosure Obligation.
Material fees and costs that the customer will be charged for the transactions, holdings and accounts. Reg BI does not require firms to disclose fees and costs at a granular level for each customer. Instead, it is sufficient to provide standardized numerical amounts (reasonable dollar or percentage ranges). Disclosures should clearly and accurately convey when and why a fee is being charged, and if the fee is being paid per transaction or on a quarterly basis.