Regulation Best Interest

Regulation Best Interest was adopted by the SEC in June 2019 and became fully effective on June 30, 2020. It replaced the longstanding suitability standard that governed broker-dealers, under which a broker only needed to recommend products that were suitable for a customer based on their financial profile. Under Reg BI, brokers must now act in the retail customer's best interest at the time of a recommendation and cannot place their own financial interests ahead of the customer's.

Reg BI imposes four specific obligations on broker-dealers. The Disclosure Obligation requires brokers to clearly explain the capacity in which they are acting, all material fees and conflicts of interest, and any limitations on the securities or strategies they recommend. The Care Obligation requires brokers to exercise reasonable diligence and skill in understanding the product being recommended and to have a reasonable basis for believing it is in the customer's best interest. The Conflict of Interest Obligation requires firms to identify, disclose, and mitigate conflicts that could influence recommendations. The Compliance Obligation requires firms to maintain written policies and procedures designed to achieve compliance with all of Reg BI's requirements.

One of the practical changes Reg BI introduced is heightened scrutiny of sales incentives. Broker-dealer compensation structures that reward brokers for selling higher-commission products over functionally equivalent lower-cost alternatives are now viewed as conflicts that must be addressed. The SEC expects firms to mitigate rather than merely disclose such conflicts where they could harm retail customers.

Reg BI applies specifically to recommendations to retail customers — individuals using securities accounts for personal, family, or household purposes. It does not cover ongoing account monitoring unless the firm has explicitly agreed to provide that service. Investment advisers registered under the Investment Advisers Act of 1940 are governed by the separate and longstanding fiduciary standard, which requires them to act in the client's best interest at all times, including in an ongoing advisory relationship.

The SEC also adopted Form CRS (Customer Relationship Summary) alongside Reg BI, requiring broker-dealers and investment advisers to deliver a standardized two-page summary describing their services, fees, conflicts, and disciplinary history. Form CRS helps retail investors compare the types of firms they can work with and understand the legal obligations each owes them.

Since implementation, the SEC and FINRA have issued guidance and examination priorities focused on assessing whether firms have genuinely restructured their compliance programs and compensation incentives or have simply added disclosure language without substantive change. Enforcement actions have targeted firms that failed to adequately mitigate conflicts tied to revenue-sharing arrangements and proprietary product recommendations.