Regulation Best Interest and Suitability
- What Is Regulation Best Interest?
- What Do the Specific Obligations Under Reg Bi Require?
- What Is Suitability?
- How Do I Know if the Recommendations Made by My Broker Are in My Best Interest?
- What Should I Do if the Investments in My Portfolio Do Not Seem to Align With My Stated Investment Objectives?
Regulation Best Interest (“Reg BI”), put into effect in 2020 to heighten the Suitability Standard, outlines the standard of care that FINRA brokers owe their customer-clients. In short, Reg BI requires brokers to prioritize the best interests of their retail customers before their personal or firm-related interests. Reg BI consists of four (4) obligations: Disclosure, Care, Conflict of Interest, and Compliance.
- Disclosure Obligation – this obligation requires brokers and dealers to provide certain prescribed disclosures, before or at the time of an investment recommendation, about the recommendation and the relationship between the customer and the broker and/or dealer.
- Care Obligation – this obligation requires brokers and dealers to exercise reasonable diligence, care, and skill in making an investment recommendation and to have a reasonable basis to believe that the investment is in the best interests of the customer-client.
- Conflict of Interest – this obligation requires brokers and dealers to establish, maintain, and enforce written policies and procedures reasonably designed to identify and address conflicts of interest.
- Compliance Obligation – this obligation requires brokers and dealers to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.
Suitability refers to the standard of care brokers and dealers owed to customer-clients when making investment recommendations before Reg BI went into effect in June 2020. Generally, an investment or recommendation was deemed “Suitable” for a particular customer if it met the customer’s defined investment needs and objectives.
Let’s say you decide to open a brokerage account with XYZ Brokerage Firm. In the process of opening your account, you notify your broker that you are seeking low-risk investments with high liquidity. After understanding your objectives, your broker recommends that you invest most of your funds in Blue-Chip equities. Based on your stated goals of (1) low-risk and (2) high liquidity, these recommendations are both in your best interests and suitable for your investment profile. Blue-Chip equities generally represent the safest equities you can purchase. For example, think Coca-Cola, Johnson & Johnson, or Visa. Further, these stocks will, generally, always be available to trade on exchanges, so they are also highly liquid.
Now, let’s say the same sequence of events happens, but instead of recommending Blue-Chip equities, your broker recommends that you invest your funds in a private placement (a privately held company whose shares are not traded on any exchanges). This would be a prime example of an investment recommendation that is not in your best interests and not suitable for your investment profile since private placements are inherently risky investments that are extremely difficult to divest from (i.e., highly illiquid).
When you open an account with a broker, the broker is obligated to learn certain information about you to properly make investment recommendations. This information includes your overall financial situation, risk tolerance, investment horizon, liquidity needs, and any other information that would be critical to making an investment recommendation. Smart investors should periodically compare their documented investment objectives with their portfolio holdings to ensure that their broker is recommending investments in their best interests.
If your broker has made investment recommendations that are contrary to the investment objectives that your outlined to your broker when opening your account, and you have lost money on those investments, you should consult the attorneys at Malecki Law who are highly experienced at recovering funds for investors that were recommended investments not in their best interests.