With custody, discretion, and trading authorizations covered, the final piece is understanding which standard of care applies to each type of securities professional. This is one of the most tested areas in the Ethical Practices section.
Broker-Dealers: Suitability and Best Interest
A broker-dealer that makes a recommendation must have a reasonable basis to believe it is appropriate for the customer:
- Suitability applies to recommendations to institutional customers: the recommendation must be suitable based on the customer's investment profile (financial situation, objectives, risk tolerance, time horizon, and the like)
- Best interest applies to recommendations to retail customers: under SEC Regulation Best Interest, the broker-dealer must act in the retail customer's best interest at the time of the recommendation and not place its own interest ahead of the customer's
- A suitability or best-interest obligation cannot be waived or disclaimed by customer agreement; even if a customer insists on an unsuitable transaction, the firm must not recommend it
- These standards apply to recommendations; an unsolicited trade the customer initiates without a recommendation is not subject to them
Exam Tip: Gotchas
- The standard applies to recommendations. If a customer initiates a trade without a recommendation, the obligation does not attach; if the agent recommends it, it does, regardless of whether the customer also wanted the trade.
- Reg BI is not a fiduciary standard. It requires a broker-dealer to act in the customer's best interest at the point of recommendation, but it does not impose the ongoing duty of loyalty that an investment adviser owes.
NASAA Incorporation of the Best-Interest Standard
NASAA's Statement of Policy on Dishonest or Unethical Business Practices incorporates Reg BI at the state level (amendments adopted in 2025). A broker-dealer that fails to act in a retail customer's best interest when making a recommendation commits a dishonest practice under state law, enforceable by the Administrator.
Trustees: The Prudent Investor Standard
A trustee or other fiduciary who invests and manages assets for a beneficiary is held to the prudent investor standard (under the Uniform Prudent Investor Act, adopted in substantially all states). The trustee must invest as a prudent investor would, judge each investment in the context of the entire portfolio, and act solely in the beneficiaries' interest. This standard governs the trustee/beneficiary relationship, not the broker-dealer/customer or adviser/client relationship.
Standard of Care Summary by Role
| Role | Applicable Standard |
|---|---|
| Broker-dealer agent (retail customers) | Best interest (Regulation Best Interest), incorporated by NASAA as a state-law standard |
| Broker-dealer agent (institutional customers) | Suitability |
| Investment adviser | Fiduciary duty (loyalty + care) under the Investment Advisers Act and the USA antifraud provisions |
| Trustee / fiduciary | Prudent investor standard |
Think of it this way: The standard of care increases as the relationship becomes more trust-based. Broker-dealers owe a best-interest/suitability standard at the time of recommendation; investment advisers owe an ongoing fiduciary duty; trustees owe the prudent investor standard with duties of loyalty and impartiality to beneficiaries.