Reg. BI – Defining Some Terms Surrounding Retail Customers
Regulation Best Interest doesn’t apply to just everybody. It creates obligations that broker-dealers owe to retail customers. Well, what are those?[1]
A “retail customer” is a natural person, or a natural person’s legal representative who:
receives a recommendation of any securities transaction or investment strategy from a broker-dealer; and
uses the recommendation primarily for personal, family, or household purposes.
A “legal representative” of a retail customer doesn’t have to be a lawyer. The term encompasses non-professional legal representatives, including non-professional trustees that represent the assets of a natural person.
The SEC’s interpretation of when a retail customer “uses” a B-D’s recommendation is a little weird. They say that happens when, as a result of a recommendation involving securities or an investment strategy, one of three things happens:
The retail customer opens a brokerage account with the broker-dealer, even if the B-D isn’t compensated for that. (Mm-hm. Got it. Even though the B-D isn’t being compensated for the account opening, some transaction-based compensation is probably right around the corner now that it’s open.)
The broker-dealer receives compensation as a result of that recommendation, even if that retail customer does not have an account at the B-D. (Roger dodger. The B-D makes a recommendation, the customer acts accordingly, and the B-D gets paid as a result. We’d say the customer “used” the recommendation here, too.)
The retail customer has an existing account with the broker-dealer and receives a recommendation from the broker-dealer, regardless of any resulting compensation. (Wait, wut? This condition says that if a retail customer has an account with a B-D, and the B-D makes a recommendation, that recommendation is automatically “used”. We dug back into the adopting release for Reg. BI (see note 202) to confirm that’s what they meant, and it is.)
Finally, a retail customer who uses the recommendation primarily for “personal, family or household purposes” means any recommendation to a natural person would be subject to Reg. BI, unless the retail customer is seeking brokerage services for commercial or business purposes.
[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.