Reg. BI – Account Monitoring
One thing you can do is agree to monitor retail customers’ investments on a periodic basis for purposes of recommending changes in their investments.[1] Many customers will think this is cool and good. But you don’t have to do it! Agreeing to monitor accounts lies beyond the requirements of Regulation Best Interest.
But what if you agree to monitor accounts?
Still, if you do agree to monitor a customer’s account, Reg. BI will apply, and several things follow.
You are taking on an obligation to review and make recommendations with respect to a particular account (e.g., to buy, sell or hold) on the specified, periodic basis that you have agreed to with the retail customer. For example, if you agree to monitor your retail customer’s account on a quarterly basis, the quarterly review and each resulting recommendation to purchase, sell, or hold will be a recommendation subject to Reg. BI.
You have to disclose the specific terms of exactly what you’re agreeing to monitor, including the scope and frequency of the monitoring. (We’ll talk more about Reg. BI’s Disclosure Obligation later.)
The agreed-on monitoring will involve an implicit recommendation to hold (that is, a recommendation not to buy, sell, or exchange securities in a particular account) at the time the monitoring starts. And Reg. BI does apply to those implicit hold recommendations.
What does Reg. BI not do on account monitoring?
Reg. BI specifically does not do a number of things with respect to account monitoring. First, as we discussed above, it doesn’t impose a duty to monitor a retail customer’s account. Second, it doesn’t change the scope of account monitoring that you can agree to provide. Third, it doesn’t change the scope of activities that would come within the “solely incidental” prong of the broker-dealer exclusion to the definition of “investment adviser” in the Advisers Act. We’ll talk more about this one more later also.
Voluntary Reviews
Also, you may voluntarily – without any agreement with your customer – review the holdings in your retail customer’s account to determine whether to provide a recommendation to the customer. This voluntary review isn’t “account monitoring” that creates implicit recommendations subject to Reg. BI. It also doesn’t create an implied agreement that you’re obligated to monitor a retail customer’s account. But if you do make an explicit recommendation after a voluntary review, Reg. BI is back in play and applies to that explicit recommendation.
What else?
Finally, you may choose to adopt policies and procedures that, if followed, would help demonstrate that any agreed-on monitoring is reasonably related to your primary business of effecting securities transactions.
[1] In Cady’s Regulation Best Interest series, we’ll largely be breaking down the SEC’s Small Entity Compliance Guide into smaller chunks and, we think, easier language.