Regulation Best Interest (“Reg BI”)

SEC Release No. 34-86031   Regulation Best Interest:  The Broker-Dealer Standard of Conduct

General Best Interest Obligation (“General Obligation”)

The General Obligation [§240.15l-1(a)(1)] requires a broker, dealer, and associated persons of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, to act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interests of the broker, dealer, or associated person making the recommendation ahead of the interest of the retail customer.

The General Obligation shall be satisfied if the broker, dealer, and associated person comply with all four of the following component obligations: (1) Disclosure Obligation; (2) Care Obligation; (3) Conflict of Interest Obligation; and (4) Compliance Obligation.

Specific Component Obligations

Disclosure Obligation

The Disclosure Obligation [§240.15l-1(a)(2)(i)] requires the broker, dealer, or associated person, prior to or at the time of the recommendation, to provide the retail customer, in writing, full and fair disclosure of:

All material facts relating to the scope and terms of the relationship with the retail customer, including:

  • That the Broker, dealer, or associate person is acting as a broker, dealer or associated person of a broker or dealer with respect to the recommendation;
  • The material fees and costs that apply to the retail customer’s transactions, holdings, and accounts; and
  • All material facts relating to conflicts of interest that are associated with the recommendation.

Care Obligation

The Care Obligation [§240.15l-1(a)(2)(ii)] requires the broker, dealer, or associated person, in making the recommendation, exercises reasonable diligence, care and skill to:

  • Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;
  • Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interests of the broker, dealer, or such associated person ahead of the interest of the retail customer; and
  • Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile and does not place the financial or other interest of the broker, dealer, or such natural persons making the series of recommendations ahead of the interest of the retail customer.

Conflict of Interest Obligation

The Conflict of Interest Obligation [§240.15l-1(a)(2)(iii)] requires the broker or dealer to establish, maintain, and enforce written policies and procedures reasonably designed to:

  • Identify and at a minimum disclose, in accordance with paragraph (a)(2)(i) of the Rule, or eliminate, all conflicts of interest associated with such recommendation;
  • Identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for an associated person of a broker or dealer to place the interest of the broker, dealer, or associated person ahead of the interest of the retail customer;
  • (1) Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitation, in accordance with subparagraph (a)(2) (i) of the Rule, and (2)prevent such limitations and associated conflicts from causing the broker, dealer, or associated person to make recommendations that place the interest of the broker, dealer, or associated person ahead of the interest of the retail customer; and
  • Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within an limited period of time.

Compliance Obligation

The Compliance Obligation [§240.15l-1(a)(2)(iv)], in addition to the policies and procedures required by paragraph (a)(2)(iii) of the Rule, requires the broker or dealer to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest. A reasonably designed compliance program should address controls, remediation of non-compliance, training and periodic review and testing.

Key Definitions

KEY DEFINITIONS (unless otherwise provided, all terms used in Regulation BI shall have the same meaning as in the Securities Exchange Act of 1934. In addition, the following definitions shall apply for purposes of this Rule:

  • Retail Customer means a natural person, or the legal representative of such natural person, who (i) receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or associated person of a broker or dealer and (ii) uses the recommendation primarily for personal, family, or household purposes.
  • Retail Customer Investment Profile includes, but is not limited to, the retail customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer or associated person in connection with a recommendation.
  • Conflict of Interest means an interest that might incline a broker, dealer, or a natural person who is an associated person of a broker or dealer – consciously or unconsciously- to make a recommendation that is not disinterested.

Reg BI Tools

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