Regulation Best Interest (Reg BI)
Regulation Best Interest, adopted by the SEC in 2019 and effective June 30, 2020, establishes a standard of conduct for broker-dealers when making recommendations to retail customers.
Core Requirement
When making a recommendation to a retail customer, a broker-dealer and its associated persons must act in the best interest of the customer at the time of the recommendation, without placing their own financial or other interest ahead of the customer's interest.
Key Terms
| Term | Definition |
|---|---|
| Retail Customer | Natural person receiving services for personal, family, or household purposes |
| Recommendation | Suggestion to buy, sell, or hold securities, or investment strategy |
| Best Interest | Based on reasonable understanding of customer's investment profile |
| Investment Profile | Age, financial situation, objectives, risk tolerance, etc. |
The Four Component Obligations
Reg BI requires broker-dealers to comply with four distinct obligations:
1. Disclosure Obligation
Requirement: Provide full and fair disclosure of material facts about the relationship and any conflicts of interest.
| Must Disclose | Details |
|---|---|
| Capacity | Whether acting as broker-dealer, investment adviser, or both |
| Fees and Costs | All material fees, costs, and compensation |
| Conflicts of Interest | Material conflicts associated with recommendations |
| Scope of Services | Types of accounts and services offered |
| Limitations | Any limitations on recommendations (e.g., proprietary products only) |
Timing: Before or at the time of the recommendation
2. Care Obligation
Requirement: Exercise reasonable diligence, care, and skill when making recommendations.
| Duty | Requirement |
|---|---|
| Understand the Product | Know the risks, rewards, and costs |
| Reasonable Basis | Belief that recommendation could be in best interest of some retail customers |
| Customer-Specific | Belief that recommendation is in best interest of particular customer |
| Consider Costs | Evaluate costs and reasonably available alternatives |
| Quantitative Suitability | Not recommend excessive transactions |
3. Conflict of Interest Obligation
Requirement: Establish, maintain, and enforce written policies and procedures to identify and address conflicts.
| Requirement | Details |
|---|---|
| Identify Conflicts | Recognize conflicts associated with recommendations |
| Disclose Conflicts | Full and fair disclosure to customers |
| Mitigate Conflicts | Reduce impact of financial incentives |
| Eliminate Certain Conflicts | Remove sales contests, quotas for specific products |
Conflicts to Address:
| Conflict Type | Example |
|---|---|
| Compensation Structures | Higher payouts for certain products |
| Proprietary Products | Incentives to recommend firm's own products |
| Revenue Sharing | Payments from product sponsors |
| Sales Contests | Prizes for selling specific products (must be eliminated) |
4. Compliance Obligation
Requirement: Establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.
| Element | Details |
|---|---|
| Written Policies | Comprehensive compliance procedures |
| Training | Educate associated persons on requirements |
| Monitoring | Supervise recommendations and identify issues |
| Recordkeeping | Document compliance efforts |
| Updates | Revise policies as rules or business changes |
Form CRS (Customer Relationship Summary)
Overview
Form CRS is a standardized disclosure document that must be provided to retail investors:
| Requirement | Details |
|---|---|
| Length | Maximum 2 pages (4 pages for dual registrants) |
| Format | Plain English, specified headings and order |
| Comparison | Includes "conversation starters" to prompt discussion |
| Filing | Filed with SEC through CRD (BD) or IARD (IA) |
Required Content
| Section | Content |
|---|---|
| Introduction | What types of services we offer |
| Fees and Costs | How we are compensated and associated costs |
| Conflicts of Interest | What conflicts we have and how we address them |
| Standard of Conduct | Our obligation to you (Reg BI vs. Fiduciary) |
| Disciplinary History | How to research firm and financial professionals |
| Conversation Starters | Questions customers should ask |
Delivery Requirements
| Situation | Timing |
|---|---|
| New Customers | Before or at earliest of: recommendation, placing order, or opening account |
| Existing Customers | Within 30 days of filing |
| Material Changes | Within 60 days of update + communicate changes |
| Upon Request | Must provide promptly |
Recordkeeping for Form CRS
| Requirement | Details |
|---|---|
| Record | Date each Form CRS was provided to each retail investor |
| Retention | Minimum 6 years |
| Method | Electronic or paper |
Reg BI vs. Fiduciary Standard
| Aspect | Reg BI (Broker-Dealers) | Fiduciary (Investment Advisers) |
|---|---|---|
| Scope | At time of recommendation | Ongoing relationship |
| Standard | Best interest | Best interest + loyalty |
| Duty of Loyalty | Not explicitly required | Required |
| Compensation | May have conflicts (disclosed) | Must avoid or fully disclose |
| Duty to Monitor | Not required | Ongoing monitoring |
| Enforcement | SEC, FINRA | SEC or State |
On the Exam: Reg BI is a "point-in-time" standard at the recommendation, while the fiduciary duty is ongoing. Both require acting in the customer's best interest, but fiduciary includes an ongoing duty of loyalty.
2025 Enforcement Focus
The SEC has increased enforcement of Reg BI, focusing on:
| Area | SEC Focus |
|---|---|
| Care Obligation | Are recommendations truly in customer's best interest? |
| Conflict Disclosure | Are all material conflicts adequately disclosed? |
| Policies and Procedures | Are they reasonably designed and enforced? |
| Documentation | Is compliance adequately documented? |
Key Takeaways
- Reg BI requires acting in retail customer's best interest at recommendation
- Four obligations: Disclosure, Care, Conflict of Interest, Compliance
- Must eliminate sales contests and quotas for specific products
- Form CRS is max 2 pages (4 for dual registrants) and must be delivered before recommendation
- Reg BI is point-in-time; fiduciary standard is ongoing
Under Regulation Best Interest, the Care Obligation requires broker-dealers to:
Form CRS must be:
Under the Conflict of Interest Obligation, broker-dealers must: