The Securities and Exchange Commission has posted several new Frequently Asked Questions addressing various scenarios concerning the use of the terms “adviser” and “advisor” by dually registered and stand-alone broker-dealers.
The FAQs were first published in January 2020 to help firms prepare for Regulation Best Interest (Reg BI) and have been updated periodically since that time to help provide additional insight and clear up any ongoing confusion.
Dually Registered BDs. Under the Disclosure Obligation section of the FAQs, the SEC explains that where a dually registered broker-dealer uses or distributes firm material—such as marketing material that generally refers to financial professionals using the terms “advisers” or “advisors”—such language, by itself, would not presumptively violate the capacity disclosure requirement. This would be the case whether or not the financial professional using the firm’s materials is also a supervised person of an investment adviser, the FAQ notes.
This answer is in response to a question about whether the financial professionals of dually registered BD, including those who are not also supervised persons of an investment adviser, can use or distribute firm materials that generally describe a firm’s financial professionals as “financial advisors” or by another general title using the term “adviser” or “advisor.”
The SEC staff reminds BDs, however, that in order to satisfy the disclosure obligation when making a recommendation, they must make full disclosure of all material facts relating to the scope and terms of the relationship, including the capacity in which they are acting with respect to the recommendation. This applies to both the BD and associated persons of the BD.
Standalone BDs. By contrast, where a standalone broker-dealer uses or distributes firm materials, such as marketing materials that generally refer to its financial professionals using the terms “advisers” or “advisors,” such disclosures would presumptively violate the capacity disclosure requirement under the disclosure obligation. The FAQ further explains, however, that where a financial professional is also a supervised person of an investment adviser, such individual may use his or her own materials (or materials prepared by the registered investment adviser) that refer to himself or herself as an “adviser” or “advisor.”
Regarding whether a BD—whether standalone or dually registered as an investment adviser—can use or distribute issuer-prepared marketing and disclosure materials if the issuer-prepared materials generally describe financial professionals collectively as “financial advisors” or by another general title using the term “adviser” or “advisor,” the FAQs say this is generally acceptable and would not presumptively violate the capacity disclosure requirement.
Two additional FAQs under the Disclosure Obligation address:
- whether a broker-dealer who is not also a registered investment adviser may use the term “adviser” or “advisor” in their firm’s “doing business as” or “marketing” name; and
- whether an associated person of a BD broker-dealer who also offer services on behalf of a bank (“dual-hatted broker-dealer-bank employee”), when acting on behalf of the bank, could use the term “adviser” or “advisor” in their title or “doing business as” name presumptively without violating the capacity disclosure requirement of Reg BI.
Care Obligation
Two new FAQs are addressed under Care Obligation, including what capacity a dually registered financial professional who offers both advisory and brokerage accounts would be acting in when they first meet with a potential customer.
“Determining the capacity in which a dual-registrant is making a recommendation is a facts and circumstances test, with no one factor being determinative, but the Commission considers, among other factors, the type of account, how the account is described, the type of compensation and the extent to which the dual-registrant made clear to the customer the capacity in which it was acting,” the SEC staff explains.
Where a dually-registered financial professional may not yet know and has not clearly disclosed the capacity in which he or she is acting to a potential retail customer, the financial professional should assume that both Reg BI and the Investment Advisers Act would apply, and the account recommendation generally should be evaluated under both, the FAQ further advises.
Rollovers: As for whether a dually registered financial professional in their BD capacity may recommend that a customer roll over or transfer assets from their brokerage account to an advisory account where they will be charged an ongoing asset-under-management fee, the SEC says that it depends.
“In the staff’s view, prior to recommending a retail customer roll over or transfer assets, such as from a brokerage to an advisory account, you should take into consideration, among other factors, the potential risks, rewards, and costs associated with the transfer or rollover of the securities, including whether the transfer or rollover would require a sale of securities,” the FAQ advises.
The SEC notes, for example, that where a retail customer holds class A mutual fund shares, the sale of such shares could generate a taxable event and could result in the forfeit of certain benefits, such as rights of accumulation or rights of exchange. Moreover, class A shares typically charge a front-end sales load, but tend to have a lower 12b-1 fee and annual expenses than certain other mutual fund share classes, the SEC observes, adding that the BD should understand these potential risks, rewards and costs when weighing whether a recommendation is in the best interest of the retail customer.
A total of eight questions were added to the FAQ document. The SEC does caution that these responses represent the views of the staff of the Division of Trading and Markets, and like all staff guidance, have no legal force or effect.
The SEC’s FAQs on Form CRS are available here.
