Regulation BI

Regulation BI raised the standard of conduct for broker-dealers dealing with retail customers. Under the older suitability standard, a recommendation only had to be appropriate for the customer. Under Regulation BI, the recommendation must be in the customer's best interest, and the firm may not place its own interests — commissions, revenue sharing, proprietary product sales — ahead of the customer's.

The rule applies when a broker-dealer or associated person recommends a securities transaction or an investment strategy, including account type recommendations such as rolling over a retirement plan. A retail customer is a natural person, or that person's legal representative, who uses the recommendation primarily for personal, family, or household purposes.

Compliance rests on four obligations. The disclosure obligation requires the firm to disclose material facts about the relationship, including capacity, fees, and conflicts, largely through Form CRS. The care obligation requires reasonable diligence, care, and skill to understand the recommendation and to conclude it is in the customer's best interest given their investment profile, including consideration of reasonably available alternatives and cost. The conflict of interest obligation requires written policies to identify and then eliminate, mitigate, or disclose conflicts. The compliance obligation requires written policies and procedures reasonably designed to achieve compliance with the rule as a whole.

Regulation BI is tested on the Series 65 and Series 66 exams, where candidates compare it with the fiduciary duty owed by investment advisers, and on the Series 9, where the focus shifts to the supervisory systems a principal must maintain. Expect questions on who counts as a retail customer, which of the four obligations a fact pattern violates, and how Regulation BI differs from plain suitability.