Regulation Best Interest

Rothwell Securities makes fund recommendations both to individuals investing their household savings and to the investment committee of a 400 million dollar corporate pension plan. Regulation Best Interest applies to a recommendation made to:

1. A.the pension committee only, since institutional accounts receive the highest standard of care.The reverse is true; institutional accounts fall outside the retail customer definition.
2. B.neither, because Regulation Best Interest governs only investment advisers.Regulation Best Interest is the standard for broker-dealers; advisers are governed by their own fiduciary duty.
3. C.both, because Regulation Best Interest applies to every recommendation a broker-dealer makes.The rule is expressly limited to retail customers as defined.
4. D.the individuals, because a retail customer is a natural person using the recommendation for personal, family or household purposes.Correct. That is the definition of retail customer in the rule.

Why: Regulation Best Interest applies to recommendations made to a retail customer, defined as a natural person, or the legal representative of a natural person, who uses the recommendation primarily for personal, family or household purposes. Individuals investing household savings fit that definition. A corporate pension plan committee is not a natural person acting for household purposes, so the recommendation to it falls outside Regulation Best Interest, though FINRA suitability obligations and the firm other duties still apply.

A representative tells a retiring customer that she should roll her workplace retirement plan into an IRA at the rep's firm. No specific security is mentioned. Does Regulation Best Interest apply?

1. A.No, because the assets are still held in the workplace planWrong. The location of the assets when the advice is given is irrelevant; the advice is what is regulated.
2. B.No, because no particular security was recommendedWrong. This is the most common misreading of the rule. Reg BI reaches securities, strategies, and account types alike.
3. C.Yes, but only if the rep earns a commission on the rolloverWrong. Compensation creates a conflict that must be handled, but Reg BI applies whether or not the rep is paid for the specific recommendation.
4. D.Yes, because a recommendation of an account type, including a rollover, is coveredCorrect. Account-type and rollover recommendations are squarely within Reg BI.

Why: Yes. Reg BI expressly covers recommendations of account types, including rollovers and transfers, not just recommendations of individual securities. The rep must have a reasonable basis to believe the rollover itself is in the customer's best interest.

Under Regulation Best Interest, a "retail customer" is:

1. A.A natural person, or the legal representative of one, who uses a recommendation primarily for personal, family, or household purposesCorrect. This is the definition, and the legal-representative clause is the part most often overlooked.
2. B.Any customer who is not an accredited investorWrong. Accredited investor is a Regulation D concept for private offerings and has nothing to do with who is owed Reg BI protection.
3. C.Any customer whose account holds less than 1 million dollarsWrong. There is no asset threshold in the definition. A very wealthy individual is still a retail customer.
4. D.Any customer who opens a cash account rather than a margin accountWrong. Account type has no bearing on retail status; it affects credit terms, not the standard of conduct.

Why: A retail customer is a natural person, or the legal representative of a natural person, who receives a recommendation and uses it primarily for personal, family, or household purposes. The legal-representative language sweeps in trustees, executors, and holders of a power of attorney acting for an individual.

Regulation Best Interest (Reg BI) applies to...

1. A.Broker-dealers and their associated persons making recommendations to retail customersCorrect — Reg BI applies to broker-dealer recommendations to retail customers.
2. B.All self-directed trades placed without a recommendationReg BI is triggered by a recommendation; unsolicited self-directed trades are not recommendations.
3. C.Only institutional accountsReg BI protects retail customers, not institutional accounts.
4. D.Investment advisers onlyAdvisers are governed by a fiduciary standard; Reg BI targets broker-dealers.

Why: Reg BI applies to broker-dealers and their associated persons when they make a recommendation of a securities transaction or investment strategy to a retail customer.