Regulation Best Interest is now five years old, and broker-dealers and their counsel have had enough time to acclimate to it that the more interesting question is no longer "what does it say" but "where does it actually bite." The answer, in our experience handling customer claims, is more often than firms would like to admit.
Reg BI took effect in June 2020. It replaced the old "suitability" standard for broker-dealer recommendations with a new "best interest" standard codified at 17 C.F.R. § 240.15l-1. The headline was that broker-dealers would now be subject to something resembling a fiduciary duty when making recommendations to retail customers. The reality is more nuanced — and understanding the nuances is what determines whether a customer claim succeeds.
The Four Component Obligations
Reg BI is built around four component obligations that together form the "general obligation" of acting in the retail customer's best interest at the time a recommendation is made. Failure to satisfy any one of the four is a violation of the general obligation.
The Disclosure Obligation. Broker-dealers must provide retail customers, in writing and prior to or at the time of the recommendation, full and fair disclosure of all material facts about the scope and terms of the relationship and all material facts relating to conflicts of interest associated with the recommendation. Form CRS is part of this, but Form CRS alone is rarely sufficient. The disclosure must be specific to the recommendation, not generic.
The Care Obligation. The broker-dealer must exercise reasonable diligence, care, and skill to (1) understand the recommendation's potential risks, rewards, and costs; (2) have a reasonable basis to believe the recommendation could be in the best interest of at least some retail customers; and (3) have a reasonable basis to believe the recommendation is in the best interest of the particular retail customer based on that customer's investment profile. The third prong is where most Reg BI claims live.
The Conflict of Interest Obligation. The firm must establish, maintain, and enforce written policies and procedures reasonably designed to identify and at minimum disclose — or eliminate — conflicts of interest associated with the recommendation. Critically, certain conflicts must be eliminated, not merely disclosed. Sales contests, quotas, bonuses, and non-cash compensation tied to specific securities or types of securities within a limited time period are among them.
The Compliance Obligation. The firm must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI as a whole. This is the firm-level obligation, and it is the door through which failure-to-supervise claims walk in.
The Most Important Thing Reg BI Does Not Do
Reg BI does not impose a fiduciary duty on broker-dealers in the sense in which that term is used under the Investment Advisers Act. Broker-dealers do not owe their customers ongoing monitoring obligations. They are not subject to a duty of loyalty that prohibits acting on conflicts of interest — they are subject to a duty to disclose or eliminate conflicts, which is a different and lesser standard. And, crucially, the SEC has been clear that compliance with Reg BI does not require a broker-dealer to recommend the lowest-cost product, the highest-yielding product, or any specific product.
This is why the dichotomy between broker-dealer claims and investment adviser claims matters so much in practice. A broker-dealer can have a real conflict of interest in connection with a recommendation, disclose it adequately, and still satisfy Reg BI — provided the recommendation is otherwise in the customer's best interest at the time it is made. An investment adviser, by contrast, owes a federal fiduciary duty that imposes duties of care and loyalty extending across the entire advisory relationship.
Where Reg BI Actually Bites
In our case work, Reg BI violations cluster around several recurring fact patterns:
Inadequate care-obligation analysis for complex products. Structured notes, market-linked CDs, leveraged ETFs held long-term, non-traded REITs, and private placements remain the most common Reg BI battlegrounds. The firm's product approval process should generate a paper trail addressing the second prong of the care obligation — that the product could be in the best interest of some retail customers. When that paper trail is thin, that is the first piece of leverage.
Sales contests and limited-time incentives. The conflict-of-interest obligation requires elimination, not disclosure, of certain incentive structures. We continue to see firms that have ostensibly retired sales contests but still run de facto contests through internal recognition programs, league tables, and travel incentives tied to specific products.
Form CRS that does not match the actual relationship. A Form CRS that describes a transactional, recommendation-by-recommendation relationship cannot be reconciled with an account record showing continuous monitoring, discretionary trading, or ongoing portfolio management. Where the actual conduct exceeds the disclosed scope of the relationship, customers can plausibly argue they were dealing with a de facto investment adviser subject to fiduciary duties.
Failure to consider reasonably available alternatives. The SEC has consistently emphasized in adopting releases and risk alerts that the care obligation includes a duty to consider reasonably available alternatives, particularly when the recommended product is more expensive than substitutes. This is the obligation most often overlooked in firm supervisory reviews.
What This Means for Customer Claims
Reg BI is best understood as a regulatory standard with private enforcement consequences. The SEC has been explicit that Reg BI does not create a private right of action. But Reg BI violations are routinely pled as the regulatory standard underlying claims for breach of FINRA Rule 2010, breach of state-law fiduciary duty, negligent supervision, and common-law fraud. In FINRA arbitration, the panel will hear evidence about Reg BI compliance, will hear from compliance and supervisory experts on both sides, and will frequently render awards calibrated to the gravity of the regulatory violation.
The practical lesson is that Reg BI has changed the structure of customer claims more than it has changed the substantive law of customer remedies. The standard is higher, the documentation is more extensive, and the firm's compliance record is more likely to be on display. When that record is incomplete, the customer's position is correspondingly stronger.