SEC Regulation Best Interest Compliance Checklist — Reg BI Obligations

Reg BI applies to recommendations made to "retail customers" — natural persons (and legal representatives of natural persons) who receive a recommendation primarily for personal, family, or household purposes. The first step in any Reg BI compliance program is a definitive list of all account types that constitute retail customer accounts. This typically includes: individual accounts, joint accounts, IRA accounts, Roth IRA accounts, custodial accounts, and trust accounts where the beneficiary is a natural person. Institutional accounts (registered investment companies, corporations, endowments) are generally not retail customers under Reg BI but remain subject to FINRA suitability rules.

Form CRS (Customer Relationship Summary) must be delivered to each retail customer at the earliest of: account opening, a recommendation, a request for account information, or before or at the time of any investment advice. Form CRS must accurately describe: the types of services offered, fees and costs, conflicts of interest, legal standards applicable to your firm, and disciplinary history. The document must meet SEC formatting requirements (2 pages for broker-dealers) and use prescribed headings. Maintain evidence of delivery for each customer.

Reg BI's Conflict of Interest Obligation requires firms to establish, maintain, and enforce written policies and procedures to: identify all conflicts of interest associated with recommendations to retail customers; at a minimum, disclose conflicts; and mitigate or eliminate conflicts that create an incentive to place the firm's interest ahead of the retail customer's interest. Conduct a comprehensive conflicts inventory covering: compensation structures, revenue sharing, proprietary products, affiliated products, sales contests, differential compensation by product type, and third-party payments. Document the inventory and update it annually.

Reg BI explicitly requires firms to eliminate compensation practices that create financial incentives to make recommendations that are not in the retail customer's best interest. This specifically includes: sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of specific securities within a limited period. Review all registered representative compensation plans for these practices. Identify any indirect incentives that effectively achieve the same result through bonus pools or tiered payout structures tied to specific product sales.

The Care Obligation requires that each recommendation be in the retail customer's best interest based on a reasonable understanding of: the customer's investment profile (financial situation, tax status, investment objectives, risk tolerance, investment horizon), and the potential risks, rewards, and costs of the recommendation. Firms must also consider "reasonably available alternatives" — a requirement that goes beyond suitability by requiring comparison against alternatives in the product universe the firm offers. Document the basis for recommendations, particularly for high-cost products, illiquid products, and complex or leveraged instruments.

Rule 17a-14 requires broker-dealers to update Form CRS within 30 days whenever any information in the form becomes materially inaccurate. Material changes include: new disciplinary events, changes in ownership, new fee structures, new types of services offered, and changes to conflicts of interest disclosures. Additionally, updated Form CRS must be delivered to existing retail customers within 60 days of a material change (or at the next recommended communication). Maintain a log of Form CRS version history with change dates and descriptions.

The SEC has specifically emphasised that rollover recommendations — recommending that a customer move assets from a 401(k) to an IRA, or from one IRA to another — are subject to Reg BI's best interest standard. The recommendation must be based on a comparison of: plan fees vs. IRA fees, investment options, services offered, and customer-specific factors. Document this analysis for every rollover recommendation. The DOL's expanded definition of investment advice fiduciary (effective September 2024) also applies to many rollover recommendations — coordinate IRA rollover compliance with your legal team.

Reg BI's Compliance Obligation requires written policies and procedures reasonably designed to achieve compliance with all components of Reg BI. Policies must address: Form CRS preparation and delivery; care obligation documentation and supervision; conflict identification, disclosure, mitigation, and elimination; and training requirements for all registered persons. Review policies and procedures at least annually and update for new products, regulatory guidance, and examination findings. Senior management must be accountable for maintaining the compliance framework.

All registered representatives making recommendations to retail customers must be trained on Reg BI requirements: the four obligations, what "best interest" means in practice, how to document the care obligation, conflict identification and escalation procedures, and Form CRS delivery requirements. Training must be documented with attendee names, dates, and content covered. New registered representatives must receive Reg BI training before making recommendations. Conduct annual refresher training that addresses recent SEC guidance and examination findings.

The Disclosure Obligation requires full and fair disclosure — before or at the time of the recommendation — of all material facts relating to the conflict of interest associated with the recommendation. Disclosure must be sufficient for a retail customer to understand the conflict. Review your conflict disclosure mechanisms: are all identified conflicts disclosed in Form CRS? Are conflicts disclosed at the point of specific recommendations where applicable? Is the disclosure language specific enough (not merely "we may have conflicts") to meet the "full and fair" standard?

The SEC has specifically noted that recommendations of complex products (leveraged ETFs, structured products, options, variable annuities) and higher-cost products require more rigorous documentation of the best interest analysis. The care obligation requires considering "reasonably available alternatives" — so recommending a high-fee variable annuity over a lower-cost alternative requires documented justification based on the customer's specific circumstances. Review the supervision process for complex product recommendations to confirm adequate review and documentation.

Reg BI requires mitigation of conflicts that create an incentive to make recommendations not in the customer's best interest when disclosure alone is insufficient. Mitigation may include: restructuring compensation to reduce differential incentives, implementing supervisory review requirements before recommending higher-compensation products, creating approved product lists that are regularly evaluated for cost competitiveness, and establishing review processes for recommendations of proprietary products. Document your conflict mitigation measures and their intended effect on each identified conflict.

Reg BI compliance requires supervisory review of recommendations to retail customers. Supervisors must be trained on the best interest standard and conduct meaningful review — not rubber-stamp approval — of representative recommendations. Review processes should be calibrated to risk: higher-cost products, complex products, recommendations to elderly or unsophisticated customers, and large concentrated positions warrant more intensive supervisory review. Document supervisory review actions and escalation decisions.

The care obligation requires understanding the customer's investment profile when making a recommendation. Profiles must be collected for all retail customers and kept current — stale profiles that have not been updated for years do not provide an adequate basis for care obligation compliance. Verify that: profile collection captures all required information (financial situation, investment objectives, risk tolerance, investment horizon, tax status, liquidity needs), that profiles are reviewed when customers contact the firm, and that recommendations are documented against the current profile.

A key difference between Reg BI and the prior suitability standard is the requirement to consider reasonably available alternatives — not just whether the recommended product is suitable, but whether it is the best available option for that customer from among the products the firm offers. Establish and document procedures for how representatives are expected to consider alternatives: product comparison tools, approved product lists with comparative cost and risk data, and supervisory review that challenges "why this product and not X?" Test this in your supervisory review process.

At least annually, conduct a formal assessment of Reg BI compliance program effectiveness: review a sample of recommendations and documentation for care obligation compliance, test conflict disclosure at point-of-sale, verify Form CRS delivery records, review compensation structures for prohibited sales incentives, and assess the currency and completeness of compliance policies. Document the scope and findings of the annual review. Use findings to update policies, training, and supervisory procedures before the next examination cycle.

When a registered representative makes recommendations to multiple members of the same household, each recommendation must independently satisfy the best interest standard for the specific account and customer. The care obligation applies account-by-account — what is in the best interest of an elderly parent in a conservative IRA may differ from what is in the best interest of their adult child in a growth-oriented brokerage account, even if served by the same representative. Supervisory procedures should include review of household-level recommendation patterns for inconsistencies.

Records relating to Reg BI compliance must be maintained under SEC Rule 17a-4. This includes: Form CRS and all versions with delivery evidence, care obligation documentation for each recommendation, conflict of interest policies and procedures, training records, supervisory review records, and the conflict inventory and mitigation documentation. The general broker-dealer record retention period is three years (first two years in an accessible location). Ensure your recordkeeping system captures all Reg BI-relevant documents and that records can be produced promptly in an examination.