Peter M. Hong

Peter Hong uses his many years of service at the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to guide clients through the various regulatory requirements involved in the offer of financial services and products. His practice includes the registration and regulation of investment advisers, broker-dealers, commodity trading advisors, commodity pool operators, and introducing brokers under federal and state laws, as well as the formation and ongoing compliance obligations of registered and private investment companies.

SEC Updates Regulation Best Interest FAQs – Our Initial Take

On February 11, 2020, the staff of the Securities and Exchange Commission (SEC) updated its Frequently Asked Questions on Regulation Best Interest.  The update added a new “Retail Customer” section with four new Q&As.

  • The first Q&A reminds firms to carefully consider the extent to which associated persons can make recommendations to prospective retail customers in compliance with Regulation Best Interest, should the prospective retail customer use the recommendation.
  • The second Q&A clarifies that Regulation Best Interest applies to recommendations by a limited purpose broker-dealer of private offerings to accredited investors that are retail customers, and that the application of Regulation Best Interest is not dependent on whether the broker-dealer engages in limited activity.
  • The third Q&A seeks to clarify that the term “legal representative” of a retail customer would not cover regulated financial services industry professionals, which include registered investment advisers and broker-dealers, corporate fiduciaries and insurance companies, and the employees or other regulated representatives of such entities.
  • The final Q&A states that a retail customer, or a non-professional legal representative of such retail customer, cannot waive or agree to waive the protections afforded under Regulation Best Interest.

The update also adds a new Q&A in the Recommendations section that a recommendation of a securities account (e.g., a self-directed brokerage account) is covered by Regulation Best Interest even if the broker-dealer does not intend to provide subsequent recommendations subject to Regulation Best Interest in the new account.

Finally, the update added a new Q&A in the Disclosure section that confirms that while a standalone broker-dealer will generally be able to satisfy the requirement to disclose, in writing, all material facts about the scope and terms of its relationship with the retail customer, by delivering the relationship summary, a dually registered, broker-dealer or its associated persons, will not be able to satisfy the requirement with the relationship summary alone but must also disclose the capacity in which they are acting with respect to the retail customer.