10.1.1 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 interests. A customer is considered a retail customer for purposes of Reg BI if all of the following are true:
- • The customer is a natural person or a natural person's legal representative (such as a trustee or executor). In other words, the customer is an individual rather than a legal entity such as a corporation.
- • The customer receives a recommendation from a broker-dealer about any securities transaction, or any investment strategy involving securities.
- • The customer uses the recommendation primarily for his personal investing (or that of his family or household).
Note that accredited investors are not excluded from being considered retail customers under Reg BI, as long as they are natural persons and meet the other conditions. Likewise, Reg BI is not limited to recommendations about exchange-traded securities. It applies to recommendations about private placements, OTC trades, and any other securities transaction or investment strategy involving securities.
Regulation Best Interest applies to customers with any type of account, including margin accounts, retirement accounts, and education savings accounts. It also applies to customers who have not yet opened an account. Recommendations about what kind of account a customer s