The “BI” in Regulation BI, or “Reg BI” stands for “Best Interests.” Financial advisors and securities brokers have a regulatory duty to act in the best interests of their investors or “customers.”

Background

As of June 30, 2020, the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) require securities brokerages and their representatives to comply with Regulation BI. Rule 15/-l(a)(l) of Reg BI requires a “broker, dealer, or a natural person associated with a broker or dealer,” when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, to act in the best interest of that investment customer at the time the recommendation is made. This means the customer’s interest must be placed before the financial advisor, broker or brokerages’ interests.

Care Obligation

Reg Bi’s Care Obligation requires financial advisors, brokers and brokerages to exercise reasonable diligence, care, and skill to, among other things, have a reasonable basis to believe that a series of recommended investments or investment strategies. This applies even if in the investment customer’s best interest when viewed in isolation, is not excessive and is in the customer’s best interest in light of the customer’s investment profile.

For example, FINRA brough action against Mack Miller for Regulation BI violations. The settlement entered into in August 2025 gives detail of his action. FINRA accused Miller of recommending an excessive amount of trades. The cost of the trades were more than the portfolio, if reasonably invested, could make in a year. The cost was approximately 30% of the average equity in the portfolio. This places the interests of the broker ahead of the customer because the broker will be making more than the customer.

Test

Regulators offer no single test defines when trading is excessive. They do give factors such as the turnover rate, the cost-to-equity ratio, and the use of in-and-out trading in a customer’s account are relevant to determining whether an associated person has excessively traded a customer’s account in violation of Reg BI. The turnover rate represents the number of times that a portfolio of securities is exchanged for another portfolio of securities.

The cost-to-equity ratio measures the amount an account must appreciate just to cover commissions and other expenses. In other words, it is the break-even point where a customer may begin to see a return. A turnover rate of six or more, or a cost-to-equity ratio above 20 percent, generally indicates that a series of recommended transactions was excessive.

Previous Rule

Prior to June 30, 2020, FINRA Rule 2111 required members and associated persons to have a reasonable basis to believe that a recommendation of a transaction or investment strategy involving a security or securities to any customer is suitable for the customer. Reg BI supplements and adds to this rule.

Under FINRA Rule 2111.05( c ), its suitability rule, FINRA required brokers and employees to have a reasonable basis for believing that a series of recommended transactions is suitable. FINRA requires this of any recommendations, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer in light of the customer’s investment profile. FINRA Rule 2111 is still in effect but, as of June 30, 2020, it no longer applies to recommendations that are subject to Reg BI, and the element of control was removed from the quantitative suitability component.

Contact Jeffrey Pederson if you have questions concerning Reg BI or the suitability rule. All initial consultations are free.