SEC Regulation Best Interest Compliance Checklist — Reg BI Obligations

Form CRS (Customer Relationship Summary) must describe in plain English: the types of client relationships and services offered, fees and costs, conflicts of interest, required legal standards, and disciplinary history. Review Form CRS against actual firm practices — discrepancies between Form CRS and actual services are a Reg BI violation. Update Form CRS within 30 days of any material change. Retain each version with the effective dates.

Form CRS must be delivered to retail investors at or before the earliest of: entering into an investment advisory relationship, making a recommendation of securities, or opening a new account. Electronic delivery is permitted but must be actually delivered — directing a customer to a website where Form CRS is posted is insufficient delivery. Maintain delivery records with date, method, and recipient for SEC and FINRA examination purposes.

The Care Obligation requires a broker-dealer to have a reasonable basis to believe that the recommended transaction or strategy is in the best interest of the particular retail customer at the time of the recommendation. Documentation should capture: the customer's investment profile (financial situation, tax status, investment experience, investment time horizon, liquidity needs, risk tolerance, investment objectives), the specific recommendation, the analysis supporting why the recommendation is in the customer's best interest, and whether alternatives were considered.

Reg BI's Care Obligation requires knowledge of the specific retail customer. Collect and document: age, annual income, net worth, investment experience, investment time horizon, liquidity needs, risk tolerance, and investment objectives. Update profiles when customers inform you of changes. Profiles must be complete before any recommendation is made — recommendations made without adequate customer profile information fail the Care Obligation.

The Care Obligation requires a broker-dealer to consider the costs and risks of a recommendation and to evaluate whether a less expensive or less risky alternative would be in the customer's best interest. Supervisory procedures must require registered representatives to document their consideration of alternatives, particularly for: more expensive share classes of mutual funds, higher-cost products where lower-cost alternatives exist, recommendations to roll over assets from lower-cost accounts, and complex products with retail alternatives.

The Conflict of Interest Obligation requires written policies that: identify all conflicts of interest associated with recommendations to retail customers, disclose material conflicts to retail customers, eliminate or mitigate material conflicts that cannot be eliminated. Document each identified conflict and the mitigation measure: sales contests based on securities recommendations must be eliminated; differential compensation structures must be disclosed and supervised; conflicts from third-party revenue (12b-1 fees, revenue sharing) must be disclosed.

Reg BI explicitly prohibits sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period. Review all compensation plans, bonus structures, and non-cash incentives against this prohibition. Quota-based awards that incentivize recommending one product over another to customers are prohibited — not just required to be disclosed. Document the compensation review and any changes made.

The Compliance Obligation requires written policies and procedures reasonably designed to achieve Reg BI compliance. WSPs must address: care obligation documentation, customer profile collection and updating, conflict identification and mitigation procedures, Form CRS delivery and updating, registered representative training on Reg BI, escalation procedures for potential Reg BI violations, and regular testing of Reg BI compliance. FINRA examiners review whether WSPs are specifically designed for Reg BI rather than simply updated NASD suitability procedures.

Reg BI training must cover: the four obligations, the difference between Reg BI and prior FINRA suitability standards, specific scenarios relevant to the firm's business, documentation requirements, and conflict of interest disclosures. Training must be updated when regulatory guidance is issued or when examination findings identify gaps. Document all training: date, content, attendees. New registered representatives must complete Reg BI training before making recommendations.

Establish an exception-based review process for recommendation categories with elevated Reg BI risk: recommendations to roll over retirement assets (compare costs, services, and investments), recommendations of complex products (structured notes, leveraged ETFs, non-traded REITs), recommendations to move assets between account types, and recommendations involving high-commission products where lower-cost alternatives exist. Document the review, the reviewer's findings, and any follow-up.

Recommending a higher-cost share class (e.g., Class A or C shares) when a lower-cost share class (e.g., Class I, R6, or no-load equivalent) is available and suitable is a paradigmatic Reg BI violation. Review your fund recommendation process: do registered representatives have access to information about all available share classes? Do supervisory procedures require consideration of the least expensive suitable share class? FINRA has cited this as a top enforcement priority under Reg BI.

Recommendations to roll over 401(k) or other retirement assets into IRAs managed by the broker-dealer are among the highest-risk Reg BI recommendations. Required documentation: the customer's specific reasons for the rollover, comparison of costs between the current plan and the proposed IRA, comparison of investment options, services available, distribution options, protection from creditors, and required minimum distribution implications. This documentation must exist before the recommendation is made.