A 72-year-old retiree living on $3,200 a month asks you to put her entire $180,000 IRA into a single high-yield junk bond fund. She says she wants income. You know the fund is rated below investment grade. If you execute the trade, you just violated the care obligation. The exam will test whether you know why -- and what you should have done instead.
Reg BI is the SEC's standard of conduct for broker-dealers when recommending securities to retail customers. It does not replace FINRA's suitability rule. It layers on top of it. You need to know both.
Reg BI has four component obligations. The exam tests all four.
You must deliver Form CRS (Customer Relationship Summary) at or before the time you make a recommendation. Form CRS is a brief, plain-language document. It describes your firm's services, fees, conflicts of interest, and disciplinary history.
KEY: Form CRS goes to the customer before or at the recommendation. Not after the trade. Not at account opening if the recommendation comes later.
Common mistakes
- Confusing Form CRS with Form ADV Part 2A. Form CRS is the Reg BI disclosure document for broker-dealers. Form ADV Part 2A is the brochure for registered investment advisers. The exam offers Form ADV as a distractor when asking about Reg BI requirements.
- Thinking disclosure cures sales contests. Most conflicts under Reg BI require disclosure and management. Sales contests are the exception. They must be eliminated entirely. If a question asks which conflict must be eliminated rather than disclosed, the answer is sales contests, quotas, and bonuses tied to selling specific securities.
- Mixing up selling away and outside business activities. Selling away (Rule 3280) involves private securities transactions without firm notification. Outside business activities (Rule 3270) involve non-securities compensation like tax preparation or real estate. The exam tests the rule number and the type of activity. Securities transactions = 3280. Non-securities work = 3270.
Bottom line
- Reg BI imposes four obligations: Disclosure, Care, Conflict of Interest, and Compliance
- Form CRS must be delivered at or before the first recommendation, not after
- Sales contests tied to specific securities must be eliminated, not just disclosed
- Three suitability types: reasonable-basis, customer-specific, and quantitative (churning)
Exam shortcut
When a question mentions a broker-dealer recommending to a retail customer, think Reg BI and its four obligations. When it mentions discretionary authority, upgrade to fiduciary duty. The trap pattern: the exam offers "disclose and proceed" as a cure for sales contests. Disclosure fixes most conflicts -- but sales contests must be eliminated. For timeline questions: ACATS is 3-then-6. Elder hold is 15 (plus 10).
The full lesson (about 3,354 words, 22 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B6
- B7
- B8
- B9
- B10
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