The staff of the US Securities and Exchange Commission’s (“SEC”) Division of Trading and Markets (“Staff”) recently posted four new items to its compilation of Regulation Best Interest (“Reg. BI”) frequently asked questions (“FAQs”), all of which address the use of the terms “adviser” and “advisor.”
Given that the compliance deadline for Reg. BI is June 30, 2020, approximately two months away, broker-dealers and dual registrants would be wise to review the new FAQs in short order and make any necessary changes to communications and other items, such as business cards, before the compliance date. These new FAQs are summarized below.
Broker-Dealers That Are Not Also Registered Investment Advisers
The first question posed in this recent series of FAQs is whether a broker-dealer that is not also a registered investment adviser can use the term “adviser” or “advisor” in the firm’s name or title. The Staff’s response was no. The Staff said that the SEC presumes that the use of these terms in a name or title by such a broker-dealer is “a violation of the requirement to disclose the broker-dealer’s capacity under Regulation Best Interest’s Disclosure Obligation.”
However, broker-dealers can use these terms when they are acting in a role specifically defined by federal statute that does not entail providing investment advisory services to retail customers, e.g., as a municipal advisor, commodity trading advisor, or advisor to a special entity. A broker-dealer that provides advice in other capacities outside the context of investment advice to a retail customer can “in its discretion” use these terms.
The Staff’s reference to discretion in this context appears to be a warning that these terms, even in the context of such a federally defined role, should not be used in such a way that would create confusion regarding the firm or its representative’s status or capacity in a given transaction.
Associated Persons Who Are Not Also Supervised Persons of Registered Investment Advisers
The next new question is whether an associated person of a broker-dealer who is not also a supervised person of a registered investment adviser can use the term “adviser” or “advisor” in his or her name or title. The Staff’s response was generally no, for reasons similar to those discussed above.
Broker-Dealers That Are Affiliated with a Registered Investment Adviser
The third new question posed is whether a broker-dealer with an affiliated registered investment adviser can use the terms “adviser” or “advisor” in its name. The Staff’s response was generally no, again for the reasons discussed above.
Broker Dealers That Are Also State Registered Advisers
The last new question posed is whether a broker-dealer that also is a state-registered investment adviser can use the title “adviser” or “advisor” in its name. The Staff’s response was yes. The Staff explained that the SEC presumed that the use of the terms “adviser” or “advisor” in a name or title by (i) a broker-dealer that is not also registered as an investment adviser or (ii) an associated person of a broker-dealer who is not also a supervised person of an investment adviser, in either case, is a violation of the Disclosure Obligation under Regulation Best Interest. In the Staff’s view, a state-registered investment adviser would be considered to be “registered as an investment adviser” for this purpose.