Skip to main content

Regulation Best Interest – Reg BI

Financial Advisers Must Act in the Best Interest of the Customer

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have implemented significant changes to the standard of conduct that governs interactions between brokerage firms and their customers with the introduction of Regulation Best Interest, or “Reg BI,” which took effect on June 30. This regulation is an addition to the Securities Exchange Act of 1934, and it sets forth a “best interest” standard of conduct for broker-dealers and associated persons when recommending any securities transaction or investment strategy, including account types, to retail customers.

Reg BI builds upon and enhances the principles previously outlined in FINRA’s Suitability Rule (Rule 2111). This rule mandates that broker-dealers and their associated persons must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on diligent gathering of information about the customer’s investment profile. The rule specifies three main suitability obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability.

Under Reg BI, broker-dealers are now required to place the financial or other interests of their customers ahead of their own and adhere to four core obligations: Care, Disclosure, Conflict of Interest, and Compliance. These obligations compel brokers to act with due diligence, fully disclose all relevant information, manage and disclose any potential conflicts of interest, and maintain and enforce policies designed to ensure compliance with the regulation.

For brokerage firms and their clients, navigating these changes can be complex and necessitates the involvement of a knowledgeable securities law firm. Such a firm can provide crucial guidance on compliance with Reg BI, ensuring that broker-dealers align their operations with the new standards. Securities law firms play a vital role in advising clients on how to adjust their policies and practices to meet the requirements of Reg BI, offering training for brokers, and developing comprehensive compliance programs.

Additionally, for investors and clients, a securities law firm can serve as an essential resource, offering advice on the implications of Reg BI and assisting in the evaluation of the suitability of investment recommendations made under this new standard. These legal experts ensure that the rights of investors are protected under the evolving regulatory landscape, fostering trust and integrity in the broker-client relationship.

Care Obligation

The care obligation requires that the BD, or an associated person of the BD, in making the recommendation, exercises reasonable diligence, care and skill to:

Disclosure Obligation

The disclosure obligation requires a BD or associated person, prior to or at the time of the recommendation, to provide the retail customer, in writing, full and fair disclosure of:

Conflict of Interest Obligation

To satisfy the conflict of interest obligation, the BD must establish, maintain and enforce written policies and procedures reasonably designed to:

Compliance Obligation

In a new part of the general obligation, and in addition to the procedures required by the conflict of interest obligation, a BD must also establish, maintain and enforce written policies and procedures designed to achieve compliance with Regulation BI as a whole. These procedures must not only address conflicts of interest, but also compliance with the disclosure and care obligations. The SEC believes that, while creating an affirmative obligation with respect to Regulation BI as a whole, the compliance obligation provides sufficient flexibility to establish compliance procedures across a broad range of business models. A reasonably designed compliance program generally would also include controls, remediation of noncompliance, training, and periodic review and testing.