Most of the regulations
Regulation best interest (Reg BI)
Reg BI was designed to help protect retail customers in their relationships with broker-dealers (investment advisers are held to their fiduciary duty under the Investment Advisers Act instead), requiring additional disclosures, limiting certain activities, and different interpretations of previous rules and regulations. Also created was the Form CRS, a new customer relationship summary form.
The simple idea is that if a customer seeks a recommendation from a broker-dealer, or advice from an investment advisor, they are entitled to a recommendation or advice that is in their best interest as a customer. The firm must strive to put the client’s best interest ahead of its own. This is an increase above simple suitability requirements.
Reg BI only applies to retail customers. For simplicity, a retail customer is a natural person or their non-professional legal representative who will receive a recommendation of a transaction with securities or an investment strategy involving securities from a broker-dealer, and uses that recommendation for personal, household, or family reasons and purposes.
Form CRS is a new relationship disclosure document that broker-dealers and investment advisors must provide for retail customers. Form CRS must be provided no later than account opening, placing an order, or receiving a new recommendation. Unlike many other disclosure documents, this one has a page limit of 2, so it is concise. The CRS must discuss the services offered along with;
- The fees, costs, potential conflicts of interest, and a standard of conduct associated with those relationships and services
- Whether the firm or its financial professionals currently have legal or disciplinary history reports
- How to obtain certain information, like copies of documents and related materials, from and about the firm.
Broker-dealers file form CRS with the Central Registration Depository (CRD/Web CRD), while investment advisors would file with the Investment Adviser Registration Depository (IARD) as the part 3 of form ADV.
Brokerage firms, as part of the general obligation, must fulfill the following 4 specific obligations to satisfy Reg BI;
- Disclosure - The firm must provide certain required disclosures regarding any recommendations made and the relationship between the firm and that customer before or at the time the recommendation was made.
- Care - The firm must exercise reasonable diligence, care, and skill in making recommendations.
- Conflicts of interest - The firm must establish, maintain, and enforce written policies and procedures reasonably designed to identify every conflict of interest associated with its recommendations and, at a minimum, disclose or eliminate it. It must also mitigate conflicts that give a representative an incentive to put their own or the firm’s interest ahead of the customer’s, disclose and manage any material limits on what it can recommend, and eliminate sales contests, sales quotas, bonuses, and non-cash compensation based on sales of specific securities or specific types of securities within a limited period of time.
- Compliance - the firm must establish, maintain, and enforce written procedures and policies that are reasonably designed to achieve compliance with the rules of Reg BI.
Regulation M
Regulation M is designed to prevent market manipulation during securities offerings by prohibiting issuers, underwriters, and selling shareholders from artificially influencing the price of the offered securities, protecting against manipulation while the issuer is selling securities in the primary market. Broker-dealers acting as syndicate/selling group members may have their market activities restricted just prior to the issuance, to help prevent manipulation. How long the restricted period lasts depends on the public float and average daily trading volume of the security. Securities that are actively traded generally won’t have much, if any, restricted period, and syndicate/selling group members can trade once the securities are released. Securities that are thinly traded are a much bigger concern, as those have much more manipulation potential, and would therefore have longer restricted periods. The specific lengths aren’t needed. The issuer and its selling shareholders are prohibited from buying shares of their company’s stock in the secondary market while their company is in the process of an issuance.
Stabilization
Stabilizing bids look like market manipulation because they are a legal form of it. Stabilization is used to prevent a stock price from falling below the IPO price of a firm commitment offering; it may never be used to raise the price. The lead manager, on behalf of the syndicate, may enter a single disclosed stabilizing bid, at or below the public offering price. It must be disclosed as a stabilizing bid. This is the only legal form of market manipulation the SEC allows.
Regulation S-P
The regulations around safeguarding the private information of their customers and clients is designed to protect non-public information, along with any list derived from non-public information. Publicly available information is not protected by this regulation.
Institutions, to follow Reg S-P must establish privacy policies in regard to what information they collect and keep about their clients, who has access, and how they protect it, and notify their customers about them. Additionally, the customers must have an easy way to opt out of the sharing of their non-public personal information with nonaffiliated third parties. This makes Reg S-P an opt-out rule: once the firm has given the notice and a reasonable chance to say no, it may share unless the customer opts out (17 CFR 248.10). An opt-in rule would be the reverse, with no sharing until the customer agrees. There is no opting out of the privacy notice itself. Sometimes broker-dealers work with other companies to provide services or products to the client. That might require sharing certain non-public personal information. The client can opt out of that, so their information won’t be shared, and the firm must give a reasonable way to opt out - for example a check-off box, a reply form, an online option, or a toll-free number. Making the customer write their own letter isn’t enough.
Firms must provide each customer with the privacy notice initially and then annually, unless the firm only shares non-public personal information with nonaffiliated third parties under the regulation’s exceptions (the kinds of sharing customers can’t opt out of) and hasn’t changed its privacy policies and practices since its last notice. Consumers must get the privacy notification before the firm can disclose any non-public information to unaffiliated third parties. If the firm does not intend to disclose any of that information, no disclosure is then required.
Amendments adopted in 2024, which all firms have had to follow since June 3, 2026, added breach response to Reg S-P. A firm’s written policies must include an incident response program reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information. If sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization, the firm must notify the affected individuals as soon as practicable, but not later than 30 days after becoming aware of it, unless it determines the information has not been and is not reasonably likely to be used in a way that would cause substantial harm or inconvenience. Firms must also oversee their service providers, who have to notify the firm no later than 72 hours after becoming aware of a breach.
Regulation SHO
Reg SHO deals with short sales. Reg SHO applies to equity securities and any other security that is convertible into an equity security (convertible bonds and similar). Previously, there was a practice called “uncovered short selling” or “naked shorting”, where the first part of shorting stock, borrowing the stock, was not actually completed. There can be lots of problems caused by this, so in the early 2000s, we got Reg SHO.
Location requirement
Prior to effecting a short sale transaction, the broker-dealer must know the location of the securities. They have to locate the securities, so the customer actually has something to borrow. The broker or dealer will have met these requirements if they have;
- Borrowed the security, or entered into a bona-fide arrangement to borrow the security, or
- They have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due, and
- They must document their compliance
There are many firms in the industry whose whole business model is to have securities for customers to borrow and short. They publish lists which can help make location requirements easier to meet. The SEC also accepts these, and the firm’s own internal easy-to-borrow list, which they have researched, and believes it can easily borrow securities on that list to be delivered by the delivery date.
Under Reg SHO, if a fail-to-deliver position at a clearing firm in a threshold security persists for thirteen consecutive settlement days, the participant at the clearing firm must immediately close out the position by purchasing securities of like kind and quantity.
Example: Is a close-out triggered?
A clearing firm has an unresolved fail-to-deliver position in a threshold security that has persisted for 10 consecutive settlement days. Must the firm close out the position yet?
Answer: Not yet. Reg SHO’s mandatory close-out requirement is triggered only after 13 consecutive settlement days of fails-to-deliver in a threshold security, so at day 10 the position hasn’t crossed that threshold.
Marking orders
Broker-dealers must mark every sell order of an equity security as long, short, or short exempt. Remember, a long buy opens a long position, a long sale closes a long position and a short sell opens a short position, while a short buy closes a short position. This requirement to mark order tickets goes for the sale of all equity securities on any exchange or in the OTC markets.
A person is considered long if they purchased the security. They would also be considered long if they entered into a binding contract to purchase the security but it hasn’t been delivered yet, or if they have exercised an option to buy the security, or hold a security futures contract to buy it, have received notice that the position will be physically settled, and are irrevocably bound to receive the security.
For a sale order to be marked “a long sale”, if the seller is deemed to own the security being sold, and either that the security to be delivered in the physical possession or control of the broker or dealer, or it is reasonably expected that the security will be in their physical possession no later than settlement.
For the sale order to be marked “a short sale”, if the seller doesn’t own the security being sold (delivering borrowed shares), or owns the security but doesn’t reasonably expect it will be in the possession or control of the broker or dealer before the settlement.
Example: Marking an order ticket
A customer already owns 500 shares of XYZ, held in the broker-dealer’s possession, and enters an order to sell all 500 shares. How should the order ticket be marked?
Answer: Long sale. The customer owns the shares being sold and they’re already in the broker-dealer’s possession, so the order is marked as a long sale rather than a short sale.