Small Company Investment Bankers: SEC Regulation Best Interest and Customer Relationship Summary: Tag You’re It
WHAT?
You wouldn’t think that the SEC’s Regulation Best Interest (Regulation BI) and Customer Relationship Summary (Form CRS) rules would apply to the investment banker/finder who helps small companies and their owners sell, merge or raise capital. But they do.
Regulation BI and Form CRS
Regulation BI requires a broker making a securities transaction recommendation to a retail customer to act in the best interest of the customer. Form CRS requires the firm to give a retail customer a summary of the firm’s services, costs, fees and conflicts of interest. These rules are generally effective June 30, 2020.
Retail Customer
So who is a retail customer? A retail customer is an individual who receives a recommendation or establishes a customer relationship with a broker for personal, family or household purposes. In adopting Reg BI the SEC said this does not include an employee seeking services for a small business.
The Investment Banker for a Small Company
All enterprises operate through individual employees, owners, etc. In a small company where the owner is acting for the company only, the company is not a retail investor. But it is not unusual for the ultimate transactions arranged by the investment banker in the case of a sale involves selling the owner’s stock; in the case of a capital raise requires that the owner put up some of his/her own money as part of the deal. These people are not only acting for the company. In adopting Form CRS the SEC said that where the sole proprietor or small business owner might be seeking a mix of personal and commercial services the firm must deliver a Form CRS. It said in that case the broker may treat the person as a retail customer. In a footnote it added that it assumes the broker obtains sufficient information in meeting its duty under Regulation BI that it has sufficient facts to determine if this is a for a personal or commercial purpose.
In other words, prudence suggests that the broker act as if Regulation BI and Form CRS apply.
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Please feel free to contact me if you have any questions or comments (phone 212 455 0476; cell 914 646 8035; email msimkin@securitiesregslawyer.com).
September 2019