What Is the Difference Between Suitability and Regulation Best Interest (Reg Bi)? - Transcript

Understanding the difference between suitability and Regulation Best Interest (Reg BI) is critical for investors and financial professionals alike. While both standards govern the recommendations made by brokers, Regulation Best Interest represents a more comprehensive and investor-focused framework. At Malecki Law, we help clients navigate the implications of these standards, particularly when investment disputes arise.

Before June 30, 2020, the suitability standard was the primary rule governing broker recommendations. Under this standard, brokers were required to ensure that their recommendations aligned with an investor’s profile, including age, financial goals, risk tolerance, and investment horizon. However, suitability did not impose a fiduciary duty, meaning brokers could prioritize products with higher commissions as long as they met the suitability threshold.

With the introduction of Regulation Best Interest by the SEC in June 2020, the expectations for broker conduct shifted significantly. Reg BI builds on the suitability standard by incorporating additional obligations that require brokers to prioritize their clients’ best interests over their own financial gain.

The shift from suitability to Reg BI introduces several important changes:

1. Standard of Care
   • Suitability: Brokers only needed to ensure that a recommended investment was appropriate for the client’s financial profile. They were not obligated to consider alternative options that might be more cost-effective or beneficial.
   • Reg BI: Brokers must act in the client’s best interest, which includes evaluating whether there are lower-cost or less risky options available. This obligation closely resembles a fiduciary duty.
2. Conflict Disclosure
   • Suitability: Disclosure of conflicts of interest, such as commissions or incentives, was minimal and often unclear to investors.
   • Reg BI: Brokers are now required to disclose any conflicts of interest in a clear and transparent manner, providing investors with better insight into how recommendations may be influenced.
3. Product Recommendations
   • Suitability: Recommendations were based on whether the product fit the investor’s profile, even if it was not the best option available.
   • Reg BI: Brokers must evaluate and recommend products that align with the client’s best interest, considering factors like cost, risk, and liquidity. For instance, recommending an illiquid private placement to an 80-year-old investor would likely violate Reg BI.
4. Compliance and Record-Keeping
   • Suitability: Documentation of recommendations and rationale was less stringent, making it harder to assess whether brokers acted appropriately.
   • Reg BI: Enhanced compliance requirements ensure brokers maintain thorough records of recommendations, disclosures, and justifications for their decisions.

Many investment disputes involve relationships that began before Reg BI was implemented. In these cases, brokers may be held to the suitability standard for recommendations made prior to June 2020 and to the Reg BI standard for those made afterward. This dual framework requires careful analysis of the timeline and context of each recommendation. If you suspect that investments were made that were against your best interests, you should promptly reach out to securities experts, like the attorneys at Malecki Law in New York.

Reg BI’s enhanced obligations provide greater protections for investors, particularly in complex and high-risk scenarios. By prioritizing the client’s best interest, Reg BI aims to reduce instances of conflicts of interest, high-fee products, and volatile investments that do not agree with an investor’s risk tolerance. Investors now benefit from more transparency and accountability, empowering them to make informed decisions.

However, the dual standards can create confusion, especially for long-term investors navigating disputes. Understanding whether suitability or Reg BI applies to a particular recommendation is crucial in assessing potential misconduct.

At Malecki Law, we specialize in representing investors in disputes involving suitability and Regulation Best Interest. Our experienced team carefully evaluates the recommendations made, the timing of those recommendations, and the standards that apply. We work diligently to uncover conflicts of interest, ensure proper disclosures were made, and hold brokers accountable for failing to act in their clients’ best interests.

If you believe your broker failed to meet the standards of suitability or Regulation Best Interest, contact Malecki Law at (212) 943-1233 or reach out online to schedule a consultation. We are committed to protecting your investments and ensuring that financial professionals uphold their obligations to act in your best interest.

Transcript:

If a lawyer is only talking to you about suitability you should run the other way because since June of 2020 regulation best interest is the standard and it’s a better standard than the old suitability standard that applied before June of 2020. now these days cases are often straddling because people have long time relationships with their Brokers so they straddle between suitability the old standard and regulation best interest the new standard student ability is a subset of Regulation best interest so suitability has traditionally always meant that an investment is right for you for your age your investment profile your time Horizon your risk tolerance your investment objectives and other factors like that regulation best interest adds a number of it adds almost a fiduciary duty to the scenario where the broker has to consider if there are you know lower commission products whether it this product is in your best interest or something else because of factors that may not be appropriate for you such as time Horizons like in a liquid private placement for an 80 year old person uh would be not in the best interest of that person to get involved in and there’s also a lot of other disclosure requirements that have been added about conflicts and commissions that had always been very hard hard to figure out in many cases so regulation best interest is sort of the the outgrowth of the maturity of the suitability rule under FINRA conduct rules.