Regulation Best Interest (Reg BI)
With FINRA Rule 2111 as your foundation, you can now understand the SEC's higher standard: Regulation Best Interest (Reg BI), formally SEC Rule 15l-1. Reg BI does not replace Rule 2111; it layers on top of it for a specific category of customers.
What You'll Learn
- Who Reg BI applies to (retail customers vs. institutional investors)
- The four component obligations that make up the best interest standard
- How Reg BI differs from FINRA Rule 2111 suitability
- The role of Form CRS (Relationship Summary) in Reg BI compliance
Scope and Application
- Reg BI applies to recommendations made to retail customers by broker-dealers (BDs)
- A "retail customer" is a natural person (or legal representative of a natural person) who uses the recommendation primarily for personal, family, or household purposes
- Reg BI does not replace FINRA Rule 2111. Rule 2111 continues to apply to recommendations made to institutional investors and entities
- Reg BI imposes a higher standard than suitability: the recommendation must be in the best interest of the retail customer
| Standard | Applies To | Governing Rule |
|---|---|---|
| Suitability | All customers (retail and institutional) | FINRA Rule 2111 |
| Best interest | Retail customers only | SEC Reg BI (Rule 15l-1) |
Think of it this way: Suitability asks "Is this product appropriate for the customer?" Reg BI goes further and asks "Is this the best option for the customer, considering costs and alternatives?" Both standards can apply to the same BD, depending on the customer type.
Exam Tip: Gotchas
- Reg BI does NOT replace Rule 2111. Both can apply simultaneously: Reg BI for retail customers, Rule 2111 for everyone (including institutional).
- A pension fund is an institutional customer. If the exam describes a recommendation to a pension fund, apply Rule 2111 suitability, not Reg BI.
The Four Component Obligations
Reg BI's best interest standard is satisfied by complying with four component obligations:
- Disclosure: Provide full and fair written disclosure of all material facts about the relationship and conflicts of interest, before or at the time of the recommendation
- Care: Exercise reasonable diligence, care, and skill in making the recommendation; understand potential risks, rewards, and costs; have a reasonable basis to believe the recommendation is in the customer's best interest and does not place the BD's interests ahead of the customer's
- Conflict of Interest: Establish, maintain, and enforce written policies and procedures to identify, disclose, and mitigate or eliminate conflicts of interest
- Compliance: Establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI
Exam Tip: Gotchas
- The Disclosure and Conflict of Interest obligations have no direct parallel in Rule 2111. These are unique to Reg BI.
- All four obligations require written documentation. Disclosure requires written disclosure; Care requires documented diligence; Conflict of Interest and Compliance both require written policies and procedures.
Form CRS (Relationship Summary)
As part of Reg BI, the SEC requires BDs to deliver Form CRS (Customer Relationship Summary) to retail investors. Form CRS is a brief document (no more than 2 pages for a BD) that describes:
- The types of services offered (brokerage vs. advisory)
- Fees and costs associated with those services
- Conflicts of interest
- The standard of conduct that applies (best interest for BDs)
- Disciplinary history (and where to find more information)
BDs must deliver Form CRS before or at the earliest of: a recommendation, placing an order, or opening an account.
Exam Tip: Gotchas
- Form CRS is a Reg BI requirement, not a FINRA Rule 2111 requirement. It applies only to retail customers.
- Form CRS is limited to 2 pages for a BD. The brevity is intentional so retail customers actually read it.
Key Distinctions from FINRA Rule 2111
These distinctions are frequently tested:
| Feature | FINRA Rule 2111 | Reg BI |
|---|---|---|
| Standard | Suitable | Best interest |
| Applies to | All customers (retail + institutional) | Retail customers only |
| Cost consideration | Not explicitly required | Must consider costs and compare reasonably available alternatives |
| Firm interest | Not addressed | Recommendation must not place the firm's interest ahead of the customer's |
| Disclosure obligation | No direct parallel | Full and fair written disclosure required |
| Conflict of interest policies | No direct parallel | Written policies to identify, disclose, and mitigate conflicts required |
The Care Obligation in Detail
The Care Obligation under Reg BI encompasses all elements of FINRA suitability plus two additional requirements:
- Cost comparison: The BD must consider costs among reasonably available alternatives. Not just whether the product is suitable, but whether a less expensive alternative achieves the same objective.
- No firm-first: The recommendation must not place the BD's interest ahead of the customer's interest.
Exam Tip: Gotchas
- "Best interest" is a higher standard than "suitable." Suitable is necessary but not sufficient under Reg BI.
- Cost comparison is required under Reg BI but not under Rule 2111. If two mutual funds achieve the same objective but one has lower expenses, the BD must consider the lower-cost option under Reg BI.