Reg BI (Regulation Best Interest): What Your Broker Owes You and What They Do Not

Regulation Best Interest is an SEC (Securities and Exchange Commission) rule that requires a broker-dealer to act in your best interest when it recommends a security to you, while a fiduciary duty is the continuing legal obligation an investment adviser owes to put your interests ahead of its own for the whole relationship. Reg BI governs the stockbroker who calls you with an idea and earns a commission on it. A fiduciary duty governs the registered investment adviser who manages your portfolio for a fee. It is more complicated than that, and there is a lot you need to know about Reg BI and the fiduciary duty before you decide whether your broker owed you more than you got. If a stockbroker put you into a product that paid him better than it paid you, you have every right to be angry.  You may be entitled to recover what those recommendations cost you. The stockbroker fraud team at the Law Offices of Robert Wayne Pearce, P.A. has spent 45 years litigating claims like this one, on a contingency basis, which means there is no fee unless we recover for you. In this guide, we are going to walk you through what Regulation Best Interest actually requires, who it covers and who it leaves out, the dates that decide which standard governs your claim, how the two standards separate on timing and on conflicts, and where Reg BI still leaves you with less protection than an adviser’s client gets. What Is Regulation Best Interest (Reg BI)? Regulation Best Interest is the SEC rule, codified at 17 C.F.R. section 240.15l-1, that requires a broker-dealer and its registered representatives to act in your best interest when they recommend a securities transaction or an investment strategy to you. The rule forbids them from placing their own financial interest ahead of yours at the time that recommendation is made. The Commission adopted it on June 5, 2019, under the Securities Exchange Act of 1934. The general obligation is satisfied only when a firm meets four separate component obligations: disclosure, care, conflict of interest, and compliance. Three out of four is not compliance, and the SEC wrote the rule that way on purpose. Each obligation carries its own written requirements. A stockbroker who recommended a reasonable product can still have violated Reg BI if his firm never addressed the conflicts riding on that recommendation. Reg BI reaches recommendation and not the account as a whole. It applies when your stockbroker recommends a security, an investment strategy, or a type of account to open. It does not impose an ongoing duty to monitor the account, although agreed-upon account monitoring can lead to recommendations that are subject to Reg BI. What is Reg BI Care Obligation? The Regulation Best Interest rules require broker-dealers and their financial professionals to exercise reasonable diligence, care, and skill when making a recommendation to a retail customer. It ensures that professionals do not place their own financial interests ahead of the customer’s. The Care Obligation requires broker-dealers and financial professionals to exercise diligence, care, and skill when making investment recommendations. Instead of evaluating a product in isolation, advisors must thoroughly understand the investment, analyze the customer’s profile, and ensure the recommendation directly prioritizes the client’s best interest. To satisfy the Care Obligation, a financial professional must meet three core components: SEC Prosecution of Conflicts The SEC prosecutes Reg BI conflict violations by targeting firms that rely solely on fine-print disclosures instead of actively eliminating or mitigating financial biases. Rather than accepting a “check-the-box” approach, the SEC issues heavy fines, forces the return of conflicted revenue, and penalizes firms for weak internal controls. Key prosecution areas include: In the landmark case SEC v. Western International Securities, Inc., the SEC’s first-ever Reg BI enforcement action, brokers pushed $13.3 million of high-risk, unrated corporate bonds to customers with moderate risk tolerances because the products paid out high commissions, ignoring safer, lower-cost options. Who Does Reg BI Apply to? Reg BI covers broker-dealers and the natural persons associated with them. It does not cover investment advisers, who remain bound by the fiduciary standard under the Investment Advisers Act of 1940. On your side of the relationship, the rule reaches only a retail customer. The rule text defines that as a natural person, or the legal representative of one, who receives a recommendation and uses it primarily for personal, family, or household purposes. You probably already know that the person handling your account calls himself a financial advisor. The title on the business card settles nothing. Whether he is a stockbroker subject to Reg BI or an investment adviser subject to a fiduciary duty depends on how his firm is registered and which account the recommendation touches. Dual registrants are where this gets hard to follow. Many financial professionals are registered as a representative of a broker-dealer and as an investment adviser representative at the same time. The standard that applies changes with the hat they happen to be wearing. The SEC put it plainly in the adopting release. A dual registrant is an investment adviser only as to the accounts for which it gives advice and takes compensation that subjects it to the Advisers Act. Everything else it does for you falls under Reg BI, and the Commission acknowledged that delivering the relationship summary alone is not enough for a dual registrant to disclose the capacity it is acting in. What Are The 4 Reg BI Compliance Requirements? Next, in general terms, the “Best Interest” rule imposes four obligations upon broker-dealers and their associated persons: 1. Disclosure: to provide disclosures about the type of relationships they will have with their customer before or at the time of any recommendations (which will probably be buried somewhere in their website or the fine print of the 80-100 page customer agreement and disclosure booklets only made available via the internet when the account is opened). 2. Due Care: to exercise reasonable diligence, care, and skill in making the recommendation. 3....