Regulation Best Interest (Reg BI): A Comprehensive Guide

Introduction

Regulation Best Interest (Reg BI) represents a significant shift in the standard of conduct owed by broker-dealers to retail customers. Adopted by the Securities and Exchange Commission (SEC) on June 5, 2019, and effective June 30, 2020, Reg BI was part of a broader rulemaking package aimed at enhancing investor protection. It establishes that when brokers make a recommendation to a retail customer, they must act in the customer’s best interest and cannot place their own interests ahead of the customer’s. The rule also outlines specific component obligations that must be met to comply with this new standard.

When Does Reg BI Apply?

Reg BI applies when a broker-dealer or associated person makes a recommendation to a ‘retail customer’ — defined as a natural person or their legal representative seeking advice for personal, family, or household purposes. A recommendation can include advice to buy, sell, hold, or exchange securities, investment strategies, account types, or to transfer assets between accounts. General educational materials do not trigger Reg BI.

The Four Core Obligations Under Reg BI

1. Disclosure Obligation

Broker-dealers must make full and fair written disclosure of all material facts related to the scope and terms of the relationship with the customer, including the capacity in which the broker is acting, any fees and costs, and the types of services offered. Conflicts of interest must also be disclosed. While disclosures can be supplemented orally, written records of such oral disclosures must be maintained.

2. Care Obligation

This obligation builds on FINRA’s Suitability Rule but raises the standard by requiring brokers to exercise reasonable diligence, care, and skill to ensure the recommendation is in the retail customer’s best interest. This includes: (i) understanding the risks, rewards, and costs of the recommendation (reasonable basis); (ii) confirming the recommendation fits the customer’s profile (customer-specific); and (iii) ensuring a series of recommendations is not excessive (quantitative).

3. Conflict of Interest Obligation

Firms must establish written policies and procedures to identify and disclose, mitigate, or eliminate conflicts of interest. This includes broker-level conflicts, such as compensation incentives that could lead to biased recommendations. Practices like sales contests and bonuses based on specific product sales within a limited time frame are explicitly prohibited.

4. Compliance Obligation

Firms must establish, maintain, and enforce written policies and procedures designed to achieve compliance with Reg BI. These should be tailored to the firm’s size, structure, customer base, and risk profile. Effective policies should prevent, detect, and correct violations, including processes for supervision, training, escalation, and recordkeeping.

Enforcement and Private Claims

The SEC has stated that Reg BI does not create a private right of action. However, violations may serve as evidence supporting claims of negligence, breach of contract, or violations of state securities laws in arbitration or litigation. Firms failing to comply with Reg BI may be subject to enforcement actions by the SEC and FINRA.

Conclusion

Regulation Best Interest (Reg BI) imposes heightened duties on broker-dealers, particularly in terms of documentation, conflict mitigation, and personalized recommendations. While it does not grant investors a direct cause of action, it enhances the standard against which broker conduct may be judged in disputes. Firms and brokers must ensure they are proactively complying with each of the rule’s obligations to reduce liability and enhance investor trust.

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