The Investment Lawyer: Covering Legal and Regulatory Issues of Asset Management
Prospectus Delivery Obligations, Regulation Best Interest and the
Buried Facts Doctrine:
Has the SEC Changed the Time When Prospectuses Must Be Delivered?
The SEC’s Regulation Best Interest will require a broker-dealer to provide a retail customer with information about the material fees and cost the customer will incur and facts relating to conflicts of interest associated with the recommendation that might influence a broker-dealer to make a recommendation that is not free from bias. Moreover, the broker-dealer must do so at or before the time of the recommendation. However, the SEC recognized that many material facts required to be disclosed pursuant to Reg BI, such as compensation paid to the broker-dealer, appear in prospectuses and confirmations, which are not required to be delivered to customers until after a trade is executed.
The SEC articulated a methodology for a broker-dealer to meet its Regulation Best Interest obligations while continuing to disclose material information in prospectuses and confirmations not delivered until after a recommended trade is executed. However, the SEC has also found liability for disclosures made in a piecemeal fashion, even in instances where there would have been no liability if the same disclosures were made in a single location (the Buried Facts Doctrine). Does the SEC’s methodology for meeting Regulation Best Interest obligations in instances when material facts will not be disclosed until after the recommendation is made create liability concerns under the Buried Facts Doctrine? Does a broker-dealer have to deliver a prospectus not later than the time of the recommendation notwithstanding the SEC’s articulated methodology? Ethan Corey’s article examines these issues.