Regulation Best Interest (Reg BI), adopted by the SEC in 2019 and effective June 30, 2020, establishes a "best interest" standard of conduct for broker-dealers when making recommendations to retail customers.
Four component obligations:
1. Disclosure Obligation — disclose material facts about the recommendation and the B/D relationship (via Form CRS). 2. Care Obligation — exercise reasonable diligence, care, and skill; understand the product and the customer; have a reasonable basis to believe the recommendation is in the customer's best interest. 3. Conflict of Interest Obligation — establish policies to identify, disclose, and mitigate (or eliminate) conflicts of interest. 4. Compliance Obligation — maintain written policies and procedures to achieve compliance.
Form CRS (Client Relationship Summary): A 2-page plain-English disclosure delivered to retail customers at account opening, describing services, fees, conflicts, and legal standards.
Reg BI vs. fiduciary standard: - Reg BI (broker-dealers): Best interest at point of recommendation; relationship is transactional. - Fiduciary (investment advisers): Ongoing duty of loyalty and care throughout the advisory relationship.
> Exam tip: Reg BI applies to broker-dealers making recommendations; it is NOT the same as the fiduciary standard that applies to RIAs. Know the four obligations and that Form CRS is the disclosure document. This is heavily tested on the SIE, Series 7, Series 65, and Series 66.