9.3.5.2 Regulation Best Interest
To heighten the standard of conduct for broker-dealers, the SEC introduced Regulation Best Interest (Reg BI). This new regulation is described below. It resembles, but goes beyond, the FINRA suitability rule described in the previous section.
Reg BI holds broker-dealers and their associated persons to a set of standards that exceed suitability requirements. Reg BI requires broker-dealers and their associated persons to act in their retail customers’ best interest at the time that a recommendation is made, without placing the financial or other interests of the firm ahead of their customers’ interests. Reg BI also requires firms to either eliminate, or disclose and mitigate conflicts of interest. This new standard contains four parts: the disclosure obligation, the care obligation, the conflict of interest obligation, and the compliance obligation. A retail customer is defined as any natural person who receives a recommendation from the broker-dealer for the person’s own account.
The disclosure obligation. Reg BI requires firms before or at the time a recommendation is given to provide in writing “full and fair” disclosure of all material facts about the terms and relationship between the broker-dealer and the retail customer. These material facts include:
• That the firm is acting in a broker-dealer capacity
• Material fees and costs
• Type and scope of services provided
• Any material limitations on the securities or investment strategies involving securities that may be recommended
• All material facts relating to conflicts of interest that are associated with a recommendation (e.g., conflicts associated with proprietary products, payments from third parties, compensation arrangements)
The SEC defines a conflict of interest as one that might incline a broker-dealer or an associated person to consciou