Reg. BI – What about Dual Registrants?

Of course, some entities have dual registrations: they’re both broker-dealers and investment advisers. How does a regulation designed to differentiate between the two groups deal with those who are both?[1] The SEC is a little confusing on this.

“Investment advice” gets the fiduciary treatment.

In its Small Entity Compliance Guide, it first says that Reg. BI “does not apply to investment advice provided to a retail customer by a dual-registrant when acting in the capacity of an investment adviser, even if the retail customer has a brokerage relationship with the dual-registrant or the dual-registrant executes the transaction in a brokerage capacity. In a footnote, the Commission then says this in defining a “dual registrant”:

A dual registrant is an investment adviser solely with respect to those accounts for which a dual registrant provides investment advice or receives compensation that subjects it to the Advisers Act. Although this discussion focuses on the treatment of broker-dealers that are dually registered with the Commission as investment advisers, a broker-dealer should perform the same analysis when it is engaged in other financial services (such as a bank, a commodity trading advisor, or a future commission merchant).

Individuals Making Recommendations

So, if a dual registrant is providing investment advice – not just making recommendations on securities or investment strategies – then the entity is stuck with the fiduciary duties that apply to investment advisers.

But what if you’re an individual who is dually registered (an associated person of a B-D and a supervised person of an IA) and you’re making an account type recommendation? Well, then, the fiduciary duty standard doesn’t necessarily apply! In those circumstances, the applicable standard will depend on the role you’re playing when making the recommendation. If you’re acting as a B-D, you comply with Reg. BI. To do that, you’ll have to take into consideration all types of accounts that you offer (i.e., both brokerage and advisory accounts) when recommending an account that’s in the retail customer’s best interest. If you’re acting as an investment adviser, the fiduciary standard rooted in the Advisers Act will apply.

If you’re registered only as an associated person of a broker-dealer (even if that entity is a dual-registrant or affiliated with an investment adviser), Reg. BI will apply to that account recommendation, but you only have to consider the available brokerage accounts.

[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.