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Regulation Best Interest

Regulation Best Interest (“Regulation BI”) is a broker and broker-dealer standard of conduct and was introduced by the SEC in April of 2018 as part of a larger overall plan that, once implemented, clarified and advanced the duties and responsibilities of brokers and broker-dealers to their clients. As of June 30, 2020, all brokers and broker-dealers are now required to comply with the new regulations and standards. That said, it will take some time before we start to see the lasting effects of the newly implemented regulations.

These new regulations require broker-dealers and other professionals associated with them to make recommendations regarding transactions and investment strategies, with their clients' best interest in mind, first and foremost.

Regulation Best Interest versus Suitability

Regulation BI is a higher standard of care than the previous level of “suitability,” which dictated that any investments and strategies recommended by a financial professional met their clients’ defined needs and objectives. These recommendations were appropriately labeled “suitable.” The potential problem with the standard being “suitable” is that it may not fall in line with the average customer’s expectations of their broker’s responsibilities regarding their best interests. Regulation Best Interest brings the broker’s level of responsibility to his customer more in line with that customer’s expectations of it.

Regulation BI also differs from FINRA’s suitability rule, in that it also applies to recommendations of types of accounts for retail investors. A broker-dealer should recommend types of accounts (i.e. – advisory, IRA, brokerage, etc.) that are in the client’s best interest, considering factors such as what the client requested, the client’s overall portfolio, products in the account, fees associated with the account, alternative account options, etc.

Regulation Best Interest Rules Broken Down
  • A broker or broker-dealer must act in the best interest of his or her customer at the time of making a recommendation. The broker must not put his or her own interests ahead of that of the customer.
  • A broker is required to create, maintain, and enforce an overall policy that, when implemented, will serve to help the broker identify potential conflicts of interest. The broker must also have procedures in place to disclose material facts regarding the identified conflicts of interest and when necessary, take action to mitigate or completely eliminate conflicts when necessary.
  • Specific procedures a broker-dealer implements must include mandate for all brokers to give a full and fair written disclosure of all potential conflicts of interest (i.e. – compensation arrangements) relating to a recommendation before making it.
  • Investors can rely on their brokers and broker-dealers being held to the same standard as financial advisers have been held to under the Investment Advisors Act of 1940.
  • Brokers, broker-dealers, and financial advisors shall now all be required to provide their clients who qualify as retail investors with a brief relationship summary via the Form CRS. For more information specific to the Form CRS please visit the SECs Frequently Asked Questions on the subject here.
  • Regulation Best Interest does not require the broker to monitor a client’s account after he has recommended it unless the broker agrees to do so.
  • The broker-dealer must have a familiarity with the product being recommended, have a reasonable basis to believe it is appropriate for the client as well as specifically take into account care, skill, and associated direct or indirect costs.
  • Regulation best interest prohibits sales contests, non-cash compensation, bonuses, and quotas based on sales of specific types of securities and/or specific securities within a limited timeframe.
  • Regulation Best Interest applies to “retail customers”—which means clients who are investing primarily for personal/familial (as opposed to commercial) reasons. This would also apply to legal representatives who are not financial services industry professionals and are receiving recommendations on behalf of their clients.

Based on the new enhanced rules, Regulation Best Interest will serve to better protect “retail investors.” It will better ensure that retail investors are more fully informed about recommended products prior to making investment decisions. It will better ensure retail investors are informed of any potential conflicts of interest. And it will better ensure that retail investors are receiving recommendations that do not just meet a baseline of “suitable” but are actually in their best interest. As a retail investor, you have rights. If you are concerned that you lost money due to a broker or broker-dealer’s misconduct, you might be eligible to recover some of all of it. If this is the case you should speak to a New York City securities Lawyer with experience in securities litigation and investment fraud, such as one of the skilled attorneys at Malecki Law.

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