Reg BI
Reg BI is SEC Regulation Best Interest (Release No. 34-86031), effective June 30, 2020, requiring broker-dealers to act in the best interest of their retail customers when recommending securities or investment strategies. It is enforced through four obligations: Disclosure, Care, Conflict-of-Interest, and Compliance.
The Care Obligation is the most heavily examined of the four. It requires that the broker-dealer (and its associated persons) exercise reasonable diligence, care, and skill to: (1) understand the potential risks, rewards, and costs of the recommendation; (2) have a reasonable basis to believe the recommendation could be in the best interest of at least some retail customers; and (3) have a reasonable basis to believe the specific recommendation is in the best interest of the specific retail customer in light of that customer's investment profile.
Reg BI examination focuses on specific fact patterns that recur in enforcement actions: senior clients with concentrated single-equity positions; clients with deteriorating cognitive markers and outdated POAs; recent-inheritance recipients steered into illiquid alternatives; risk-tolerance mismatches where account allocation exceeds the client's documented risk score. Examiners walk through individual recommendations asking whether the supervisory system caught the cases that warrant heightened review.
Reg BI replaced the prior FINRA Rule 2111 'suitability' standard for retail recommendations, raising the bar from 'suitable' to 'best interest'. Investment advisers (regulated under the Investment Advisers Act of 1940) are subject to a separate but parallel fiduciary duty. Form CRS, the relationship summary delivered at engagement, is the consumer-facing artifact tying together both regimes.
| Suitability (pre-2020) | Reg BI Care Obligation | |
|---|---|---|
| Standard | Recommendation 'suitable' for the customer | Recommendation in customer's 'best interest' |
| Cost analysis | Not required | Reasonable basis to believe costs are justified vs. alternatives |
| Alternatives | Not required to consider | Reasonable basis to believe this recommendation is in best interest vs. reasonably-available alternatives |
| Documentation | Client profile + suitability rationale | Profile + cost + alternatives + best-interest rationale |
| Scope | Buy/sell recommendations | Buy/sell/hold recommendations, including account-type recommendations |
Reg BI test corpora need the specific fact patterns examiners actually walk: senior accounts with concentrated single-position holdings (>20% of portfolio in one equity), accounts with diminished-capacity flags and outdated POAs, recent-inheritance windfalls (>$250K within 90 days), risk-tolerance mismatches (allocation risk score > stated tolerance). A corpus of average accounts with diversified portfolios exercises none of the supervisory paths that get cited in enforcement. The data should also include the supervisory-system inputs the recommendation needs to flag: client age, risk score, allocation, recommendation cost vs. alternatives.
Common pitfalls
- Conflating Reg BI with the Investment Advisers Act fiduciary standard. They are parallel but distinct regimes; a broker-dealer firm with an advisory affiliate is subject to both depending on which capacity the recommendation came from.
- Treating 'best interest' as identical to 'suitable.' SEC enforcement actions since 2020 have made clear the Care Obligation requires cost-and-alternative analysis a suitability review did not.
- Omitting Form CRS delivery from the test corpus. Examiners check delivery timestamps; engines that don't model the at-engagement and material-change deliveries miss a routine deficiency.
- Modeling recommendations as point-in-time without the supervisory follow-up. The Compliance Obligation requires ongoing supervision; one-shot recommendation logs miss the failure modes examiners cite.
Examples
Synthetic profile: 78-year-old retiree with $1.2M portfolio, $480K (40%) concentrated in former-employer stock. Account history shows no rebalancing recommendations from broker in 5 years. A Reg BI-compliant supervisory system flags the concentration on every quarterly review and on every recommendation that touches the account; a suitability-era system would have flagged only at account opening. Test data should include both the static concentration and the absence of trigger events over time.