Disclosing Conflicts of Interest in a Recommendation

Regulation Best Interest has four component obligations. This lesson covers only the disclosure obligation; the other three are covered later in this chapter. Retail customer is Regulation Best Interest's own natural-person test, and it is defined later in this chapter too.

What Must Regulation Best Interest's Disclosure Obligation Cover?

• Conflict of interest: under Regulation Best Interest, an interest that might incline the broker, dealer, or associated person, consciously or unconsciously, to make a recommendation that is not disinterested.
• Before or at the time of a recommendation of a securities transaction, investment strategy, or account, the firm or associated person must give the retail customer full and fair disclosure, in writing, of two things.
• First, all material facts about the scope and terms of the relationship, which covers three items:
  • the capacity in which the firm is acting
  • the material fees and costs that apply to the retail customer's transactions, holdings, and accounts
  • the type and scope of services, including material limitations on what may be recommended
• Second, all material facts relating to conflicts of interest associated with the recommendation. This is a separate branch of the obligation, not a fourth item inside the relationship disclosure.

Exam Tip: Gotchas

• The disclosure must be in writing and given before or at the time of the recommendation. A representative who explains a conflict only verbally during the pitch, or documents it only after the trade, has not satisfied the disclosure obligation.

Does Form CRS Satisfy the Disclosure Obligation?

• Form CRS: the standardized relationship-summary document a broker-dealer provides to retail investors. Its required content and delivery timing are covered earlier in this course; this section covers only how it relates to conflicts disclosure.
• Form CRS's content includes the firm's conflicts of interest, so it does touch the same subject as the disclosure obligation.
• Delivering Form CRS does not relieve a firm of any other disclosure obligation arising under the federal securities laws and regulations, or under other laws or regulations, including self-regulatory organization (SRO) rules. Each disclosure duty must be satisfied on its own terms.

Exam Tip: Gotchas

• Delivering Form CRS does not, by itself, satisfy Regulation Best Interest's disclosure obligation, even though both documents touch conflicts of interest. A firm still owes the separate, recommendation- specific written disclosure.

What Should You Check on Exam Day?

• Regulation Best Interest's disclosure obligation must be in writing and given before or at the time of the recommendation; verbal-only or after-the-fact disclosure does not satisfy it.
• Confirm the disclosure covers both branches: the scope and terms of the relationship (capacity, the fees and costs on transactions, holdings and accounts, and services) and conflicts of interest tied to the recommendation.
• Never credit Form CRS delivery as satisfying any part of the disclosure obligation; the two are separate duties.
• Remember Regulation Best Interest's other three component obligations are tested elsewhere in this chapter; this lesson covers disclosure only.