Quick Answer
Know your customer (KYC) gathers the essential facts; then Regulation Best Interest (Reg BI) governs retail recommendations while the suitability rule governs institutional ones. Firms must price fairly under the 5% policy, deliver Form CRS and the annual disclosure stack, document discretionary authority with three writings, approve day trading, avoid breakpoint sales, and recognize red flags.
The whole unit on one sheet: the standards, the numbers, the consents, and the supervisory red flags the exam loves.
The One-Liners That Win Points
- Know your customer (KYC) is fact-gathering; suitability is using the facts. Accepting instructions from an unauthorized person violates KYC even if the trade itself is suitable.
- Suitability has three layers: reasonable-basis (suitable for some investors), customer-specific (suitable for this profile), and quantitative (a series is not excessive). Quantitative requires actual or de facto control.
- Regulation Best Interest (Reg BI) governs recommendations to a retail customer (natural person, personal/family/household use). Its four obligations are Disclosure, Care, Conflict of Interest, and Compliance, and all four must be met.
- Reg BI sits ABOVE suitability. A recommendation can be suitable yet fail Reg BI when a lower-cost reasonable alternative was available; Reg BI's Care Obligation requires explicit cost consideration.
- Reg BI must ELIMINATE product-specific sales contests, quotas, bonuses, and non-cash comp; production-based comp on total firm business is permitted.
- Customer Relationship Summary (Form CRS) uses the broader "retail investor" trigger (any natural person seeking services), so it may be delivered before Reg BI even applies.
- 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, firm acceptance by a principal, and prompt written principal approval of each order. Oral authorization is never enough.
- Time and price discretion is NOT discretionary trading and is good for that single business day only.
- A day-trading firm that PROMOTES the strategy must deliver the risk-disclosure statement and either make a good-faith appropriateness determination or get a written non-day-trading agreement.
- Breakpoint sale = selling fund shares just below the discount threshold to keep the higher sales charge; the rep must 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 (less than 5% can still 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 (most recent 2 easily accessible) |
| Form CRS amendment delivery (existing customers) | Within 60 days |
| Institutional-customer threshold (suitability) | At least $50 million in total assets |
| Pattern day trader (PDT) minimum equity | $25,000 on any day the customer day-trades |
| PDT definition | 4+ day trades in 5 business days AND over 6% of total trading |
| Day-trading buying power | 4:1 intraday (4x maintenance excess) vs. 2:1 overnight |
| Day-trading margin call | Deposit within 5 business days; buying power drops to 2x until met |
| 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 to customer | Within 30 days of signing |
| Senior-investor temporary hold | 15 business days, plus 10 (25 total), plus 30 (up to 55 total) |
| Trusted Contact Person (TCP) | Reasonable efforts for customers aged 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 stapled together every year (margin risk, SIPC information, BrokerCheck notice). One envelope, three rules satisfied.
- Trigger-and-done: arrives only when the event fires. Extended-hours risk before the customer's first after-hours trade; arbitration agreement copy within 30 days of signing.
- Pass-through: whenever an issuer mails the firm. Proxy and other issuer 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. Same product, same firm, different obligation.
- The 5% policy is a guideline, not a hard cap. A 4.5% markup can be unfair on a liquid blue-chip stock; a slightly higher markup can be fair on a thinly-traded low-priced bond. 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 is unethical even without proof the rep meant to cheat. An order just below the threshold where the rep failed to advise of the discount is presumptively a violation; missing the breakpoint disclosure document is its own violation.
- The $25,000 PDT minimum must be in the account ON the day of the day trade. No next-day deposit, no cross-guarantees; day-trading buying power is 4x maintenance excess, not 4x equity.
- Both PDT conditions must be met: 4+ day trades in 5 business days AND over 6% of total trading.
- The Trusted Contact Person is informational only and cannot authorize trades, change beneficiaries, or direct disbursements. A temporary hold reaches disbursements and certain securities transactions, not all account activity.
- Failure to document the supervisory response is a discrete violation independent of the underlying conduct. The three-step duty is recognize, investigate, escalate.
One-Breath Recap
Know your customer gathers the essential facts, then Regulation Best Interest governs retail recommendations through its four obligations (Disclosure, Care, Conflict, Compliance) while suitability's three layers govern institutional ones, with Reg BI sitting above suitability and requiring 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, disclose and approve day trading while enforcing the $25,000 pattern-day-trader minimum, never sell just below a breakpoint, and recognize, investigate, escalate, and document every red flag. Nail the customer-type split and the numbers and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Recommendations and Disclosures unit for the complete lesson.