Reg. BI – What is a recommendation?

Regulation Best Interest applies to recommendations of any securities transaction or investment strategy involving securities, including account recommendations. But what is a “recommendation”?[1]

Well as you might expect, the SEC says that it “turns on the facts and circumstances of a particular situation.” It always does. But it matters if a communication:

• “reasonably could be viewed as a ‘call to action’ ” and

• “reasonably would influence an investor to trade a particular security or group of securities.”

Also, the more individually the communication is tailored to a specific customer, the more likely it will be viewed as a “recommendation.” In making those interpretations, the SEC will look to case law under the anti-fraud provisions and enforcement matters brought under FINRA rules.

Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or other brokerage account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA).

Also, Reg. BI applies not just to recommendations concerning individual securities, but also to investment strategies involving securities. These include:

• explicit hold recommendations; and

• implicit hold recommendations that are the result of account monitoring the broker-dealer has agreed to undertake.

We’ll talk next about how Reg. BI applies to dual-registrants.

[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.