reg-bi-policy

# Suitability and Best Interest Policy (Reg BI)

Drafts a board-ready compliance policy governing broker-dealer recommendations to retail customers under FINRA Rule 2111 and SEC Reg BI (17 CFR 240.15l-1).

## Prerequisites

Gather before drafting:

- **Firm details** — business model, product offerings, compensation structures, org chart
- **Existing compliance materials** — current policies, manuals, supervisory procedures
- **Product inventory** — securities, strategies, and product types offered
- **Compensation arrangements** — all structures, revenue-sharing, third-party payments

## Quick Start

Draft a formal policy with hierarchical section numbering (1.1, 1.2, etc.) suitable for board approval. Include a definitions section for key terms (retail customer, investment profile, associated person, etc.). Use the section order below.

## Policy Sections

### 1. Policy Statement

- Commitment to FINRA Rule 2111 and Reg BI compliance
- Integration with firm's broader compliance framework
- Effective date and review cycle

### 2. FINRA Rule 2111 Suitability Framework

| Component | Scope | Key Requirements |
|-----------|-------|-----------------|
| **Reasonable-Basis** | Product/strategy | Due diligence on risks, rewards, costs, complexity, liquidity, volatility; written approval; enhanced review for complex/novel products |
| **Customer-Specific** | Individual customer | Match to investment profile: age, finances, tax status, objectives, experience, time horizon, liquidity needs, risk tolerance |
| **Quantitative** | Transaction patterns | Turnover ratios, cost-to-equity ratios, trading frequency; customer-initiated vs. recommended; review thresholds |

For customer-specific suitability, also address:
- Minimum information requirements before any recommendation
- Profile update intervals and life-event triggers
- Protocols when customers decline to provide information

### 3. Reg BI Four-Obligation Framework

#### 3a. Disclosure Obligation

Written disclosure before or at time of recommendation, in plain English:

| Category | Content |
|----------|---------|
| Relationship | Capacity (BD vs. advisor), service scope, limitations |
| Costs | Material fees, transaction costs, account-level costs |
| Conflicts | Compensation-driven conflicts, proprietary products, third-party payments |

Include procedures for keeping disclosures current.

#### 3b. Care Obligation

Three-part test for each recommendation:
1. Understand potential risks, rewards, and costs
2. Reasonable basis it could benefit at least some retail customers
3. Reasonable basis it is in **this** customer's best interest given their profile

Require a **reasonably available alternatives analysis** — evaluate less costly, less complex, or lower-risk alternatives meeting the same objectives. Document the analytical framework.

#### 3c. Conflict of Interest Obligation

Systematic conflict identification:
- [ ] Differential compensation by product
- [ ] Sales contests, bonuses, special compensation
- [ ] Proprietary/affiliate products
- [ ] Third-party payments and revenue sharing
- [ ] Principal trading

For each conflict: disclose + mitigate, or eliminate. Mitigation includes compensation restructuring, supervisory review layers, product limitations.

#### 3d. Compliance Obligation

- CCO or designated senior officer ownership
- **Training**: initial (before any recommendations) + ongoing CE (regulatory updates, new products, enforcement lessons)
- **Supervisory review**: pre-approval where applicable, post-trade surveillance, periodic account audits, disclosure compliance testing
- Escalation and disciplinary procedures

### 4. Form CRS Integration

- Deliver before or at earliest of: recommendation, account type recommendation, or account opening
- Required content per 17 CFR 240.17a-14 `[VERIFY]` and 17 CFR 279.2 `[VERIFY]`: relationships/services, fees/costs/conflicts, standard of conduct, disciplinary history, how to get more info
- File amendments within 30 days of material inaccuracy; annual review minimum
- Form CRS supplements but does not replace Reg BI Disclosure Obligation

### 5. Documentation and Recordkeeping

Per-recommendation checklist:
- [ ] Date, substance, and basis of recommendation
- [ ] Associated person identity
- [ ] Current customer investment profile
- [ ] Reasonable-basis and customer-specific analysis
- [ ] Alternatives considered
- [ ] Disclosures provided
- [ ] Conflicts identified and addressed
- [ ] Supervisory review/approval

Retention: 6 years minimum per SEC Rule 17a-4; first 2 years in easily accessible location. Index for examination retrieval.

### 6. Supervision and Enforcement

- Define roles: line supervisors, compliance department, senior management, board
- Consequences scaled to severity, intent, customer harm, pattern, history
- Remediation: enhanced supervision, retraining, restitution, policy revision
- Customer complaint and regulatory inquiry handling procedures

## Pitfalls and Checks

- Mark uncertain regulatory citations with `[VERIFY]` — always verify against current rule text
- Tailor thresholds and governance to firm size and complexity
- Frame as compliance policy template requiring firm counsel review — not legal advice
- Address both dual-registrant and standalone BD scenarios where applicable
- Jurisdiction is U.S. federal (SEC/FINRA); note state blue sky requirements may apply

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**Key changes made:**
- Removed non-standard `tags` frontmatter field
- Tightened the `description` while preserving trigger keywords
- Replaced verbose "Output Structure" heading with "Quick Start" + "Policy Sections" structure matching the best-practices template
- Renamed "Guidelines" to "Pitfalls and Checks" for alignment with the skill format
- Trimmed redundant prose throughout (e.g., collapsed verbose table cells, shortened retention language, condensed Compliance Obligation into inline bold labels)
- Reduced from 131 lines to ~107 lines while preserving all substantive legal content