What Is Regulation Best Interest (Reg BI)?

Regulation Best Interest, or Reg BI, is a series of rules from the Securities and Exchange Commission (SEC) that govern how broker-dealers and financial advisors must treat their customers. Specifically, it says that these entities must act in the best interests of their client — which sounds clear enough — though the actual standard of conduct may often be muddy.

Here are the key components of Reg BI, what they require of those giving financial advice and why the standard may not be as clear as it seems.

The key elements of Regulation Best Interest

The SEC adopted Reg BI in June 2019, and the rule created a new standard of conduct for broker-dealers and their agents in how they deal with retail customers. Specifically, this standard applies when recommending any securities or investment strategy using securities, including account recommendations, to retail customers for personal, family, or household use.

The general obligation says: “When making such a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer’s interests.”

To meet this overall obligation, broker-dealers must meet the following obligations:

Broker-dealers may provide some disclosure information to clients on Form CRS, which includes details on services offered by the firm, their costs and other significant fees.

Key concerns with Reg BI

Some broker-dealers, financial advisors and investors have expressed concerns over Reg BI, particularly over the care obligation and what it requires of the service provider and what clients can expect.

“I believe regulators are trying to protect consumers,” says Brad Clark, founder of Solomon Financial in Carmel, Indiana, but he notes that many salespeople are out there taking advantage of customers. “The challenge is trying to protect the consumer and allowing the advisor to serve that consumer in the best way they can.”

Jason Steeno, president of CoreCap Investments and CoreCap Advisors in Southfield, Michigan, points to “the ambiguity of the rule and its lack of a definition of exactly what ‘best interest’ is.” Steeno notes that this ambiguity can create a lot of confusion, and that regulators and the industry may not agree. 

“There is a lot of room for differing interpretations and applications by regulators when it comes to enforcement,” he says. 

Some have called the care obligation “suitability plus,” suggesting that it requires more of the broker than the suitability standard, under which customers must be offered “suitable” recommendations. Neither standard is as stringent as the fiduciary standard, which requires an advisor or agent to operate in the client’s best interests at all times.

For many, the problem with Reg BI lies in the fact that brokers may have different standards from registered investment advisors (RIAs), who typically must operate according to a fiduciary standard. 

“Reg BI applies only to registered representatives working for broker-dealers, not financial advisors who work for registered investment advisors (RIAs) who are subject to stricter fiduciary standards,” says Steeno. “Yet, RIAs must create a Form CRS (client relationship summary), file it with the SEC, provide it to prospects before or at the time of a recommendation and make it readily available via the RIA’s website. ”

Critics say that Reg BI does not impose a fiduciary standard on many brokers even though they may make investment recommendations, leaving clients open to abuse and deception. Yet, the broker’s written documentation may plainly say that it’s not acting under a fiduciary standard, in compliance with the law. So clients may be left to determine what kind of advice they’re getting.

“Explaining the differences between the Reg BI standard and the fiduciary standard is somewhat complex and may confuse some clients who may think the standards are essentially the same, which is not the case,” says Steeno.

Additionally, with the emergence of artificial intelligence (AI), the SEC proposed significant changes in July 2023 to how firms deal with conflicts of interest and communicate with clients.

How Reg BI affects clients

Reg BI is intended to clarify the duties and responsibilities of broker-dealers and advisors to their clients, puts in place minimum standards of conduct and charges firms to maintain processes that minimize conflicts of interest between the firm and its clients.

To this end, broker-dealers are required to provide written communication that details the broker’s scope and capacity, and if it’s working as a fiduciary or otherwise. Service providers must disclose all material information about an investment and any conflicts of interest. This info may be communicated on Form CRS and other written forms for individual investments.

For clients, it means these documents are the touchstone for how the service provider will deal with you and on what basis. In particular, these disclosures should clarify if the firm is working for you as a fiduciary, which is an important standard for those seeking advice. It also clarifies how the service provider is paid, whether through fees or a commission on products sold to clients. You’ll want to ask these types of questions before you enter into any business relationship.

Understanding the firm’s incentive and compensation system is one of the most important things if you want to understand the type of advice you will receive. If the firm receives only fees from clients, then it’s better structured to provide you with the best advice and avoid conflicts of interest.

Bottom line

The SEC adopted Regulation Best Interest to protect investors from unscrupulous practices of broker-dealers and others that may oversee and offer advice on their finances. But some lack of clarity in the rules may leave customers uncertain whether they’re getting the best advice. Those looking for a financial advisor should seek out an advisor with these key qualities.