Definition
Regulation Best Interest is a 2019 rule of the U.S. Securities and Exchange Commission, effective June 30, 2020, that establishes a best-interest standard of conduct for broker-dealers and associated persons when recommending any securities transaction or investment strategy involving securities to a retail customer.
Why it matters
Regulation Best Interest replaced the suitability standard for broker-dealer recommendations to retail customers, raising the substantive bar and introducing specific obligations distinct from the general best interest standard in insurance regulation. It is the rule that governs recommendations involving variable annuities, registered index-linked annuities, and other securities-registered annuity products, and it operates alongside (but separately from) the NAIC best interest model regulation for non-securities annuity products.
How it works
Regulation Best Interest comprises four component obligations. The disclosure obligation requires the broker-dealer to provide written disclosure of material facts about the relationship and the recommendation, including conflicts of interest, before or at the time of the recommendation. The care obligation requires the broker-dealer to exercise reasonable diligence, care, and skill in making the recommendation. The conflict of interest obligation requires the broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to identify and at minimum disclose, or eliminate, conflicts of interest. The compliance obligation requires written policies and procedures reasonably designed to achieve compliance with the rule overall. The rule applies only to recommendations involving securities; recommendations of non-securities products (such as fixed and fixed-indexed annuities sold by insurance-licensed agents without securities registration) are governed by the applicable state insurance regulation.
In practice
An individual purchasing a variable annuity or registered index-linked annuity through a broker-dealer is making the transaction under Regulation Best Interest, which is structurally distinct from the best interest standard applied to non-securities annuity products. Useful questions to ask the recommending broker-dealer include: what alternatives were considered, what conflicts of interest were identified and disclosed, what the basis for the recommendation is, and whether the same recommendation would be made if the recommender's compensation were structured differently.
In the Longevity Standard Framework
Regulation Best Interest is a regulatory standard governing how lifetime income arrangements (specifically, securities-registered annuity arrangements) are recommended to retail customers. The Longevity Standard framework's mechanical legibility produces structural evidence relevant to evaluation under any standard of care — the claim profile, the cost-of-income comparison, and realized value all describe arrangements in terms that the Regulation Best Interest care and disclosure obligations can incorporate — but the framework does not itself endorse a standard of care. The framework's structural evidence is particularly relevant under the disclosure and care obligations, where the basis for a recommendation must be documented and material features identified.
Related terms
- Best interest standard
- Suitability standard
- Variable annuity
- Registered index-linked annuity
- Broker-dealer
- Mechanical legibility
- Cost of income