Reg BI (Regulation Best Interest)
Regulation Best Interest (Reg BI) is an SEC rule requiring broker-dealers to act in the best interest of retail customers when making investment recommendations. Effective June 30, 2020.
Definition
Regulation Best Interest (Reg BI) —
Regulation Best Interest (17 CFR § 240.15l-1) is an SEC rule, effective June 30, 2020, that requires broker-dealers and their associated persons to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy involving securities. Reg BI establishes four component obligations: Disclosure, Care, Conflict of Interest, and Compliance.
What Reg BI requires
Reg BI imposes four obligations on broker-dealers making recommendations to retail customers:
Disclosure Obligation: Disclose all material facts relating to the scope and terms of the relationship with the retail customer, including all material conflicts of interest.
Care Obligation: Exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs of a recommendation and have a reasonable basis to believe the recommendation is in the best interest of the particular retail customer.
Conflict of Interest Obligation: Establish, maintain, and enforce written policies and procedures reasonably designed to identify and disclose, or eliminate, all conflicts of interest associated with recommendations.
Compliance Obligation: Establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.
Reg BI vs. the fiduciary standard
Reg BI applies to broker-dealers; the investment adviser fiduciary standard under the Advisers Act applies to registered investment advisers. The two standards differ in scope and ongoing obligation:
| Reg BI (Broker-Dealers) | Fiduciary Standard (RIAs) | |
|---|---|---|
| Applies to | Retail customer recommendations | All advisory relationships |
| Ongoing obligation | At the time of recommendation | Continuous |
| Conflict of interest | Disclose or eliminate | Manage and disclose |
| Standard | Best interest | Undivided loyalty and reasonable care |
Reg BI and AI-assisted recommendations
When a broker-dealer uses AI to assist in generating investment recommendations, the Care Obligation still applies: the recommendation must be in the best interest of the specific retail customer. AI output does not satisfy the Care Obligation without advisor verification. Documentation of the AI-assisted research process and the basis for the final recommendation supports compliance.
Related
This glossary entry is general information, not legal advice.
Keep reading
All glossary →RIA vs. Broker-Dealer: Key Differences
Registered investment advisers (RIAs) and broker-dealers are both regulated financial intermediaries, but they operate under different regulatory frameworks, compensation structures, and standards of care.
Books and Records (Investment Adviser)
The books and records rules require registered investment advisers and broker-dealers to maintain specific records for defined retention periods. SEC Rule 204-2 governs RIAs; Rule 17a-4 governs broker-dealers.
Form ADV
Form ADV is the SEC's registration form for investment advisers. Part 1 contains business and disciplinary information; Part 2 (the brochure) must be delivered to clients and describes the adviser's services, fees, and conflicts of interest.