Regulation Best Interest (Reg BI)

Regulation Best Interest, or Reg BI, is the investor-protection rule adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934. It took effect on June 30, 2020, and requires broker-dealers and their representatives to act in the best interest of retail investors every time they make a recommendation involving a security or investment strategy.

The rule strengthens the long-standing suitability standard under FINRA Rule 2111, often referred to as the suitability rule. Instead of allowing brokers to meet only a “reasonable basis” analysis, Reg BI aligns the broker-dealer standard with investors’ reasonable expectations of honest, conflict-free advice. In practice, this means a broker cannot place the firm’s or the advisor’s financial interests ahead of the client’s.

The SEC designed Reg BI to close the gap between how brokerage firms market themselves as trusted advisors and how they actually operate. It draws from fiduciary principles that have long applied to investment advisers under the Investment Advisers Act of 1940. Regardless of whether an investor chooses a broker-dealer or an investment adviser, the investor is entitled to recommendations made in the investor’s best interest.

Who Qualifies as a Retail Customer?

Reg BI protects retail customers, defined as a natural person, or the legal representative of such a person, who receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer and uses the recommendation primarily for personal, family, or household purposes.

A retail customer “uses” a recommendation when, as a result of it, the customer opens a brokerage account, already has an account and acts on a new recommendation, or when the broker-dealer receives or expects to receive compensation directly or indirectly from that recommendation, even if the customer does not have an account with the firm.

Importantly, the rule makes no distinction based on wealth. A broker-dealer that recommends private offerings or limited-purpose investments to accredited investors is still subject to Reg BI if the client is a natural person using the recommendation for personal, family, or household purposes. The standard applies equally to all retail customers, regardless of net worth or accreditation status.

The SEC has made clear that while a broker-dealer will inevitably have some financial interest in a recommendation, those interests cannot be placed ahead of the retail customer’s interest.

Reg BI Obligations

Reg BI applies to any recommendation of a security or investment strategy made to a retail customer. The more individualized the recommendation, the greater the likelihood that the communication will trigger Reg BI.

Reg BI’s protections extend beyond product recommendations. The rule also governs recommendations about account types themselves. A broker who advises a customer to open a particular kind of account must first establish a reasonable understanding of the characteristics of that account type. This includes evaluating:

• The services and products provided in the account, including any ancillary services such as monitoring or advisory support.
• Alternative account types available to the customer, such as fee-based versus commission-based, tax-qualified versus non-qualified, or discretionary versus non-discretionary accounts.
• Whether the account offers the services the customer actually needs or requested.
• Whether those characteristics align with the customer’s investment profile, financial situation, and stated goals.

Recommending an account type without that analysis can violate Reg BI’s Care Obligation just as easily as recommending an unsuitable security.

The same diligence applies to recommendations of particular securities or investment strategies. A broker must form a reasonable basis to believe that the recommendation is in the best interest of that specific retail customer by:

• Understanding and considering the potential risks, rewards, and costs associated with the recommendation.
• Obtaining and analyzing sufficient information about the customer’s investment profile.
• Considering a sufficient range of reasonably available alternatives, including lower-cost or lower-risk options offered by the firm.

Reg BI creates a general obligation that can be met only if the broker complies with four component duties:

1. Disclosure Obligation
   Brokers must disclose material facts about the recommendation and about their relationship with the client, including compensation structure, commissions, and conflicts of interest.
2. Care Obligation
   Brokers must act with diligence, care, and skill in understanding both the product and the investor. They must evaluate risks, rewards, and costs before recommending a security or strategy.
3. Conflict of Interest Obligation
   Firms must identify, disclose, and mitigate or eliminate conflicts of interest. A disclosure in fine print does not cure a conflict that still drives the recommendation.
4. Compliance Obligation
   Firms must establish and enforce a compliance system that ensures adherence to Reg BI through training, supervision, and monitoring of sales practices.

Examples of Reg BI Violations

Reg BI violations often look like classic broker misconduct. Common patterns include:

• Recommending complex or high-risk products that do not match a client’s age, experience, or tolerance for risk.
• Failing to disclose conflicts of interest, such as ongoing 12b-1 fees or compensation incentives tied to certain products.
• Ignoring lower-cost or less risky alternatives that would have met the investor’s objectives.
• Concentrating accounts in speculative or illiquid securities such as GWG L Bonds, non-traded REITs, or high-yield municipal funds.
• Relying on sales materials rather than independent research or due diligence.

In one recent SEC enforcement action involving the sale of GWG L Bonds, the Commission charged a broker for violating the Care Obligation under Exchange Act Rule 15l-1(a)(2)(ii). The broker recommended GWG L Bonds to ten retail investors without exercising reasonable diligence, care, and skill to have a reasonable basis to believe the recommendation was in each customer’s best interest based on the client’s profile and the product’s risks, rewards, and costs. The SEC’s order highlights that the rule requires real analysis from financial advisors, not repetition of marketing claims or a one-size-fits-all approach motivated by commissions.

Other cases have involved firms that continued selling high-risk, high-commission products to retirees and conservative investors even after internal warnings about volatility or liquidity concerns. These practices reflect a disregard of both the Care and Conflict of Interest Obligations.

How Reg BI Differs from FINRA’s Suitability Rule

FINRA Rule 2111 requires brokers to make suitable recommendations based on a customer’s investment profile. Reg BI goes beyond suitability by imposing a higher duty of care and a proactive requirement to mitigate conflicts. The difference is one of intent. Suitability asks whether a recommendation fits the customer based on the investor’s age, financial situation, investment experience, tax status, objectives, time horizon, liquidity needs, and risk tolerance. Reg BI asks whether the recommendation truly serves the investor’s best interest.

Under Reg BI, a broker cannot recommend a more expensive or riskier product simply because it pays a higher commission. The broker must have a documented, investor-focused rationale for each recommendation. The rule also requires firms to build supervisory systems that detect and prevent conflicts, rather than merely disclose them.

Why Reg BI Matters for Investors & Holding Firms Accountable for Reg BI Violations

For years, brokerage firms have defended the sale of complex or high-fee products by pointing to disclosures and suitability paperwork. Retirees, in particular, rely on income and capital preservation and may be influenced by how brokers describe the safety or risk of an investment. Recommending leveraged products, distressed debt, or speculative bonds to those clients violates both common sense and the obligations imposed by Reg BI.

Reg BI enhances investor protection across the brokerage industry by requiring firms to act in the client’s best interest and by holding them accountable when they fail to do so. A brokerage firm that ignores its Reg BI duties or fails to manage conflicts of interest can be liable for investor losses.

Investors who suffered losses due to Reg BI violations or other broker misconduct can pursue recovery through FINRA arbitration. Reg BI also strengthens traditional claims by giving investors a clear standard to prove that a broker’s conduct fell short of what the rule requires. Common claims include unsuitable recommendations, failure to disclose conflicts, negligent supervision, misrepresentation or omission of material facts, and breach of duties owed under Reg BI.

Arbitration panels are increasingly issuing awards in cases involving Reg BI violations. Altamirano PLLC expects Reg BI to continue shaping claims tied to losses in speculative or illiquid investments such as GWG L Bonds, Inspired Healthcare Capital (IHC) DSTs, and the Easterly ROCMuni Fund. The rule gives panels a clear benchmark for measuring broker conduct against the “best interest” standard.

Recovering Investment Losses Through FINRA Arbitration

FINRA arbitration provides a confidential, streamlined process for investors to recover investment losses from brokerage firms. The experienced securities arbitration lawyers at Altamirano PLLC know how to plead and present strong case theories under Reg BI against the firms that recommended and sold the products.

In FINRA arbitration, depending on the relief requested, arbitrators may consider several types of remedies. Harmed investors may be entitled to compensatory and statutory damages, as well as other relief including disgorgement of commissions, specific performance, and injunctive or permanent relief.

Altamirano PLLC represents investors nationwide in claims involving Reg BI violations, unsuitable investment recommendations, and other broker misconduct. The firm’s principal, Jorge Altamirano, has handled more than 1,500 FINRA arbitration cases and recovered millions of dollars for clients harmed by conflicts of interest and supervisory failures.

Contact Altamirano PLLC’s Reg BI Lawyers

Reg BI establishes a “best interest” standard of conduct for broker-dealers. Brokerage firms can be held accountable when they put their own interests ahead of their clients’ interests. If you suffered losses and believe your broker placed their interests ahead of yours, call Altamirano PLLC at (212) 220-6556 or email [email protected] to schedule a free, confidential case evaluation.