SEC Regulation Best Interest (Reg BI)
Now that you understand privacy obligations, let's look at the standard of conduct that applies when broker-dealers make recommendations. Regulation Best Interest establishes a higher standard than the traditional suitability rule.
Overview
SEC Rule 15l-1 (Regulation Best Interest) establishes the standard of conduct for broker-dealers and their associated persons when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities.
- Effective: June 30, 2020
- Applies only to recommendations to retail customers - does not apply to institutional customers
- A retail customer is a natural person (or their legal representative) who receives a recommendation and uses it primarily for personal, family, or household purposes
Exam Tip: Gotchas
- Reg BI applies only to recommendations to retail customers - not every transaction. If a customer initiates an unsolicited trade, Reg BI does not apply to that transaction.
- Reg BI does not apply to institutional customers - only to natural persons (or their legal representatives) using recommendations for personal, family, or household purposes.
The Four Component Obligations
| Obligation | Requirement |
|---|---|
| Disclosure | Provide full and fair disclosure, before or at the time of recommendation, of all material facts about the relationship scope, fees/costs, and all material conflicts of interest |
| Care | Exercise reasonable diligence, care, and skill to understand the recommendation's risks, rewards, and costs; have a reasonable basis to believe it could be in the best interest of some retail customers and is in the best interest of this particular customer |
| Conflict of Interest | Establish, maintain, and enforce written policies and procedures to identify and at minimum disclose, or eliminate, all conflicts of interest |
| Compliance | Establish, maintain, and enforce written policies and procedures to achieve compliance with Reg BI as a whole |
The Care Obligation - Three Layers
The Care obligation has three distinct layers:
- Understand the recommendation: Know the potential risks, rewards, and costs
- Reasonable basis: Believe the recommendation could be in the best interest of at least some retail customers (general suitability)
- Customer-specific basis: Believe the recommendation is in the best interest of the particular retail customer based on their investment profile
Exam Tip: Gotchas
- The four obligations are: Disclosure, Care, Conflict of Interest, Compliance - all four must be satisfied, not just one.
- The Care obligation has three layers: understand the recommendation, reasonable basis (some customers), and customer-specific basis (this particular customer).
Reg BI vs. Fiduciary Duty
| Feature | Reg BI (Broker-Dealers) | Fiduciary Duty (Investment Advisers) |
|---|---|---|
| Applies to | Broker-dealers making recommendations | Investment advisers |
| Trigger | At the point of recommendation | Ongoing relationship standard |
| Monitoring duty | No continuing duty to monitor | Ongoing duty to monitor |
| Source | SEC Rule 15l-1 | Investment Advisers Act of 1940 |
Exam Tip: Gotchas
- Reg BI does not impose a continuing duty to monitor - that obligation belongs to investment advisers under fiduciary duty, not to broker-dealers under Reg BI.
- The fiduciary standard is ongoing; Reg BI only triggers at the point of recommendation.
Form CRS (Customer Relationship Summary)
Regulation Best Interest also requires broker-dealers (and investment advisers) to deliver Form CRS to retail investors.
Form CRS Requirements
- Maximum length: 2 pages for standalone broker-dealers
- Must describe:
- The types of services offered
- Fees and costs
- Conflicts of interest
- The standard of conduct applicable to the firm
- Disciplinary history (with a link to BrokerCheck or the Investment Adviser Public Disclosure database (IAPD))
Delivery Timing
Must be delivered at the earliest of:
- A recommendation
- Opening an account
- Placing an order
Exam Tip: Gotchas
- Form CRS is a maximum of 2 pages for standalone broker-dealers, not 1 page, not unlimited.
- Delivery timing: Form CRS must be delivered at the earliest of a recommendation, opening an account, or placing an order.
NASAA Integration
The NASAA Dishonest Practices Statement (as amended 2022/2025) explicitly incorporates Reg BI compliance as a requirement for broker-dealers. Failure to comply with Reg BI is itself a dishonest or unethical practice under state law.
Think of it this way: When a broker-dealer makes a recommendation to a retail customer, Reg BI is triggered. The firm must then satisfy all four obligations (Disclosure, Care, Conflict of Interest, and Compliance) and also deliver Form CRS.