Regulation Best Interest (Reg BI)
An SEC rule that requires broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies.
What is Reg BI?
Regulation Best Interest (Reg BI), which took effect on June 30, 2020, requires broker-dealers and their associated persons to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy — placing the customer's interests ahead of the broker's own financial interests. Reg BI imposes four component obligations: a Care Obligation (reasonable basis that the recommendation is in the customer's best interest); a Disclosure Obligation (upfront disclosure of material facts including conflicts of interest via Form CRS); a Conflict of Interest Obligation (policies to identify and mitigate conflicts); and a Compliance Obligation (written supervisory procedures). Reg BI is a stricter standard than the previous 'suitability' standard (which only required that recommendations be suitable, not necessarily in the customer's best interest), but is not as broad as the full fiduciary standard that applies to registered investment advisers under the Investment Advisers Act. Brokers and advisers must also provide clients with a Relationship Summary (Form CRS) explaining their services, fees, and conflicts.
Example
Under the old suitability rule, a broker could recommend a mutual fund with a 1.5% expense ratio over a nearly identical fund with a 0.5% expense ratio — as long as the higher-cost fund was 'suitable' for the customer — and earn a higher sales commission in the process. Under Reg BI, the broker must demonstrate that recommending the higher-cost fund is in the retail customer's best interest, making it much harder to justify recommendations that primarily benefit the broker.
Source: SEC — Regulation Best Interest