Regulation Best Interest (Reg BI) is the SEC rule requiring broker-dealers and their representatives to act in a retail customer’s best interest when recommending securities or investment strategies, without placing the firm’s interests ahead of the customer’s. Effective June 2020, it replaced suitability as the retail recommendation standard and reshaped how alternatives are sold in brokerage accounts.
The four obligations
Reg BI operationalizes “best interest” through four component obligations on the broker-dealer:
- Disclosure — full and fair written disclosure, before or at the recommendation, of the relationship’s material facts: capacity, fees and costs, conflicts, and limitations (such as selling only proprietary or platform-approved products). The relationship summary, Form CRS, is the standardized front door.
- Care — reasonable diligence to understand the product (reasonable-basis), match it to the specific customer’s profile (customer-specific), and avoid excessive trading (quantitative). Cost is an explicit factor; reasonably available alternatives must be considered.
- Conflict of interest — policies to identify and at minimum disclose conflicts; some must be mitigated (incentives tied to specific securities) and some eliminated (sales contests, quotas, and bonuses tied to specific securities within limited periods).
- Compliance — firmwide policies and procedures reasonably designed to achieve compliance with the whole rule.
The rule covers recommendations to retail customers, explicitly including account-type recommendations and rollovers — the retirement-money decision where Reg BI (alongside Department of Labor rules) most often bites in practice.
What it means for alternatives
Complex, costly, illiquid products are Reg BI’s stress test, and the SEC and FINRA have said so in exams and enforcement — early Reg BI actions clustered in exactly this territory. Practical consequences advisors see: heavier documentation of why a non-traded REIT, interval fund, or structured note served this customer better than reasonably available alternatives (including cheaper or more liquid ones); share class selection scrutiny where multiple classes exist; attention to concentration in illiquids; and product-shelf diligence that predates any customer conversation. Reg BI layers on top of product-specific rules like FINRA Rule 2310 — it didn’t replace them.
Positioning matters: Reg BI is a best-interest standard for broker-dealer recommendations, converging with but distinct from the fiduciary duty governing RIAs — transaction-focused rather than relationship-long. Suitability survives for institutional and non-retail contexts.
FAQ
What is Regulation Best Interest in simple terms?
The SEC rule saying brokers must recommend what’s best for the retail customer — not what pays the firm most — backed by disclosure, care, conflict, and compliance obligations.
Is Reg BI the same as a fiduciary duty?
No, though the gap is narrower than the old suitability regime. Reg BI governs broker recommendations at the point of sale; the fiduciary standard governs advisory relationships on an ongoing basis.
How did Reg BI change alternative investment sales?
More documentation and diligence: cost and reasonably-available-alternative analysis, share-class justification, concentration discipline, and firm-level product vetting — with complex illiquid products drawing the most exam attention.
Related terms
Fiduciary Standard · Suitability · Broker-Dealer · FINRA · Concentration Limit
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