Regulation Best Interest (Reg BI)

Regulation Best Interest (Reg BI) raised the standard of conduct that applies when a broker-dealer or an associated person recommends a security, an investment strategy, or an account type to a retail customer. Under the older suitability standard, a recommendation only had to be appropriate for the customer. Reg BI requires more: the firm must act in the customer's best interest and may not place its own financial or other interest ahead of the customer's.

The rule is met by satisfying four component obligations. The disclosure obligation requires full and fair written disclosure of the scope of the relationship, the fees charged, and any material conflicts — delivered in part through Form CRS, a short relationship summary. The care obligation requires the representative to understand the risks, rewards, and costs of what is recommended and to have a reasonable basis for believing it serves the customer's best interest given their investment profile. The conflict of interest obligation requires the firm to identify conflicts and then eliminate, mitigate, or at minimum disclose them — sales contests and quotas tied to specific securities within a limited period must be eliminated outright. The compliance obligation requires written policies and procedures reasonably designed to achieve compliance with the rule.

Reg BI applies to retail customers, meaning natural persons (or their legal representatives) who use the recommendation primarily for personal, family, or household purposes. It attaches at the moment of a recommendation and does not create an ongoing monitoring duty unless the firm agrees to one. It is a standard of conduct for broker-dealers and sits alongside — not on top of — the fiduciary duty investment advisers owe their clients.

The Series 7 exam tests Reg BI heavily in its rules and ethics section. Expect questions that ask you to name the four obligations, distinguish best interest from mere suitability, identify which conflicts must be eliminated rather than merely disclosed, and recognize who counts as a retail customer.