Fighting for Investors
Regulation Best Interest
In 2019 the U.S. Securities and Exchange Commission (SEC) issued Regulation Best Interest (Reg BI), 17 CFR § 240.15l-1, which became effective June 30, 2020. The regulation applies to recommendations of securities transactions or strategies to retail customers by Broker-Dealers (FINRA registered brokerage firms) and their financial advisors (associated persons or registered representatives).
The standard under Reg BI is simple - the recommendation must be in the best interest of the customer. The regulation further requires that the recommendation be made "without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer."
If you believe that your financial advisor has not acted in your best interest, resulting in losses, you should contact one of our lawyers as soon as possible.
The Regulation sets out specifics regarding the "duty of care" obligation of Reg BI, similar to a duty of care under a fiduciary duty. These include a duty similar to reasonable-basis suitability – a duty to understand the potential risks, rewards, and costs associated with the recommendation. Additionally, similar to customer-specific suitability, the recommendation must take into account the customer's investment profile. Quantitative suitability or "churning" is addressed as well – a series of recommendations cannot be "excessive."
FINRA Rules expressly address the Reg BI standard and concede that it supersedes the suitability rule, 2111. FINRA Rule 2111 was adopted in 2012 to update Suitability obligations, including specifically referring to investment strategies. The Rule states:
"A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile. A customer's investment profile includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation."
The supplementary material to FINRA Rule 2111 now states:
".08 Regulation Best Interest. This Rule shall not apply to recommendations subject to SEA Rule 15l-1 ("Regulation Best Interest")."
As set out above, Reg BI is broader than the suitability rule, but clearly recommendations must still be suitable for the customer if they are to be considered in the customer's best interest.
Most of the hundreds of FINRA arbitration claims the attorneys at Greco & Greco have filed over the years have involved some aspect of unsuitable recommendations. Suitability is a fundamental part of Regulation Best Interest, and Reg BI has been the standard for brokerage firm recommendations since 2020. If you believe that your stockbroker / financial advisor or brokerage firm has recommended stocks, bonds, funds, private placements, REITs, or other investments or strategies to you that were not suitable for your financial situation and risk tolerance, or not in your best interest, please contact Scott Greco for a free attorney consultation.
Our Virginia securities fraud lawyers represent individuals from all states across the country and have decades of experience protecting the rights of customers, and holding securities firms responsible for the acts of their brokers.