Quick Answer
Know your customer (KYC) gathers the essential facts; then Regulation Best Interest (Reg BI) governs retail recommendations while suitability governs institutional ones. Firms must price fairly under the 5% policy, deliver Form CRS and the annual disclosure stack, document discretion with three writings, approve day trading, avoid breakpoint sales, and recognize red flags.
The whole unit on one sheet: standards, numbers, consents, and the supervisory red flags the exam loves.
The One-Liners That Win Points
- KYC is fact-gathering; suitability is using the facts. An order from an unauthorized person violates KYC even if the trade is suitable.
- Suitability has three layers: reasonable-basis (suited to some investors), customer-specific (suited to this profile), and quantitative (a recommended series not excessive, with no control requirement).
- Reg BI governs recommendations to a retail customer (natural person, personal/family/household use) through four required obligations: Disclosure, Care, Conflict of Interest, and Compliance.
- Reg BI sits ABOVE suitability. A suitable recommendation can fail Reg BI when a lower-cost reasonable alternative existed; the Care Obligation requires explicit cost consideration.
- Reg BI must ELIMINATE product-specific sales contests, quotas, bonuses, and non-cash comp; firm-wide production-based comp is permitted.
- Customer Relationship Summary (Form CRS) uses the broader "retail investor" trigger (any natural person seeking services), so it may predate Reg BI.
- Net (principal) transactions: non-institutional customers give written order-by-order consent; institutional customers can use a negative-consent letter.
- Discretionary accounts need three writings: customer authorization, principal acceptance, and prompt written principal approval of each order; oral authorization never suffices.
- Time and price discretion is NOT discretionary trading; good for that single business day only.
- A day-trading firm that PROMOTES the strategy must deliver the risk-disclosure statement and make a good-faith appropriateness determination or get a written non-day-trading agreement.
- Breakpoint sale = selling fund shares below the discount threshold to keep the higher sales charge; check rights of accumulation (ROA), letter of intent (LOI), and combined purchases.
Numbers to Lock In
| Item | Value |
|---|---|
| Fair-pricing "5% policy" | Guideline, not a safe harbor (below 5% can be unfair) |
| Service-charge change notice | 30 days' advance written notice |
| Form CRS length | 2 pages standalone broker-dealer / 4 pages dual registrant |
| Form CRS retention | 6 years (easily accessible the whole period) |
| Form CRS amendment delivery (existing customers) | Within 60 days |
| Institutional-customer threshold | At least $50 million in total assets |
| Day-trading margin | Intraday-margin-deficit framework; $25,000 minimum and 4-trades-in-5-days test gone |
| Intraday-margin-deficit trigger | Deficit above the lesser of 5% of equity or $1,000 |
| Intraday-margin-deficit | Satisfy promptly, no later than the 15th business day; repeatedly missing the 5th brings a 90-day restriction |
| Typical Class A breakpoints | $50,000 / $100,000 / $250,000 / $500,000 / $1,000,000 |
| Letter of intent (LOI) window | 13 months |
| Predispute arbitration copy | Within 30 days of signing |
| Trusted Contact Person (TCP) | Reasonable efforts for customers 18 or older |
| Mail hold beyond convenience | Over 3 months needs an acceptable reason |
| Negotiable-instrument authorization records | 3 years after authorization expires |
Memory Aid: The Customer's Mailbox in Three Timing Buckets
Picture the customer's mailbox in three timing buckets:
- Annual stack: three flyers yearly (margin risk, SIPC information, BrokerCheck notice) in one envelope.
- Trigger-and-done: arrives only when the event fires, like extended-hours risk before the first after-hours trade or the arbitration copy after signing.
- Pass-through: issuer mailings, like proxy materials, forwarded to the beneficial owner.
Top Gotchas
- Reg BI vs. suitability turns on the customer: retail natural person means Reg BI, institutional or non-retail means suitability, even for the same product and firm.
- The 5% policy is a guideline, not a hard cap: a 4.5% markup can be unfair on a blue-chip stock, a higher markup can be fair on a thinly-traded bond, and disclosure never cures an unfair price.
- Disclosure does not cure a Care Obligation failure; a firm cannot disclose its way out of a poor recommendation.
- A breakpoint sale needs no intent to cheat, but it needs a purpose: the sale is kept just below the threshold in order to share in the higher sales charge; a near-breakpoint amount or a missed discount check is a red flag to investigate, not proof by itself.
- The Pattern Day Trader rule was repealed (effective June 4, 2026): the old $25,000 minimum and 4-trades-in-5-days test are gone; the intraday-margin-deficit trigger above replaces both.
- A customer who keeps missing the intraday-margin-deficit deadline faces a 90-day restriction on new or larger short positions or debit balances.
- The Trusted Contact Person is informational only and cannot authorize trades, change beneficiaries, or direct disbursements.
- Failure to document the supervisory response is a discrete violation, independent of the underlying conduct: recognize, investigate, escalate.
One-Breath Recap
Know your customer gathers the essential facts, then Reg BI governs retail recommendations through its four obligations (Disclosure, Care, Conflict, Compliance) while suitability's three layers govern institutional ones; Reg BI ranks above suitability and requires explicit cost consideration. Price fairly under the 5% guideline, get written order-by-order consent for retail net transactions, deliver Form CRS and the annual disclosure stack, document discretion with three writings, approve day trading under the intraday-margin-deficit framework that replaced the repealed pattern-day-trader rule, never keep a sale below a breakpoint to earn the higher charge, and recognize, investigate, escalate, and document red flags. Nail the customer split and the numbers, and this unit answers itself.
Need more than the recap? Read the full Recommendations and Disclosures unit.