Regulation Best Interest is usually explained as a standard for how broker-dealers treat retail customers. Inside it is a product-level obligation that works much like Know-Your-Product: before recommending a security or strategy, the firm and its registered representatives have to understand it. That obligation applies before any particular customer enters the picture, and it's the one most directly tested when examiners review how firms approve, train on and supervise the products they sell.
This paper reads Reg BI as a KYP rule. It sets out where the product-level obligation sits in the regulation, what SEC staff have said "understanding a product" means, what FINRA's examinations have found, how firms put it into practice through product review, training and heightened scrutiny of complex products, and what the written policies behind it need to contain.
Its scope is the product. Reg BI's customer-specific requirements are outside it. For how Reg BI compares with Canada's KYP rules, see Canada vs US: KYP Standards Compared.
Reg BI has four component obligations. Two of them carry the KYP load: the first part of the Care Obligation, and the Compliance Obligation that requires written policies to make it work.
Reg BI requires broker-dealers to meet four component obligations when recommending to retail customers: Disclosure, Care, Conflict of Interest and Compliance.[1][2] It covers recommendations of any securities transaction or investment strategy involving securities, including account recommendations.[2]
The Care Obligation has several components. The first is about the product, not the customer:
The test is whether the product could be in the best interest of at least some retail customers. It asks whether the firm understands what it is recommending well enough to know that, not whether the recommendation fits any particular person.
The rule applies to "a broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation."[1] The firm and each registered representative carry the obligation separately. A representative can't satisfy it just because the firm approved the product, and a firm can't satisfy it just because its representatives say they understand.
The broker-dealer must also establish, maintain and enforce written policies and procedures "reasonably designed to achieve compliance with Regulation Best Interest."[1] For the product-level obligation, that means written procedures for how the firm comes to understand products, how that understanding reaches representatives, and how it is kept current.
On April 30, 2023, SEC staff published a bulletin on the care obligations of broker-dealers and investment advisers. It is staff guidance rather than a Commission rule, but it is the most detailed public statement of what "understanding a product" means under Reg BI.[3]
The bulletin lists factors that understanding an investment or strategy involves, including:[3]
The bulletin says firms that recommend complex or risky products to retail investors "should strongly consider establishing procedures specifically designed to address recommendations of, or advice about, complex or risky products," and should consider procedures "requiring appropriate training and supervision to help ensure financial professionals understand the features, risks, and costs of a complex financial product."[3] Its examples of products warranting more scrutiny include inverse or leveraged exchange-traded products, investments traded on margin, derivatives, crypto asset securities and penny stocks.[3]
FINRA's 2026 Annual Regulatory Oversight Report includes a section on Reg BI. Among its findings on the Care Obligation is a product-level one:[4]
Among the Compliance Obligation findings are policies and procedures that state "the rule requirements but failing to identify how the firm will comply with those requirements," and failures to establish written procedures for how Reg BI training would be conducted and enforced.[4]
The report's effective practices for complex and risky products include:[4]
These echo FINRA's earlier product guidance, which continues to describe what a product review program looks like: post-approval review of new products (Notice to Members 05-26), heightened supervision of complex products (Regulatory Notice 12-03), training before selling structured products (Notice to Members 05-59), and reasonable investigation of private placements (Regulatory Notice 23-08).[5][6][7][8]
Reg BI doesn't prescribe how a firm comes to understand its products. The SEC staff bulletin and FINRA's findings together describe what a program that works looks like.
| Stage | What It Does | Evidence |
|---|---|---|
| Assessment | Documents the product's objectives, costs, key characteristics and risks, and likely performance across conditions; investigates the issuer where relevant | Product assessment memo, source documents reviewed, issuer due diligence file |
| Categorization and approval | Assigns a risk and complexity category and approves the product, with any restrictions | Approval record with category, conditions and rationale |
| Training and release | Delivers product training scaled to category before representatives may recommend | Training completion records linked to the product |
| Post-approval review | Monitors the product for changes and reassesses it periodically, more often for complex products | Monitoring records, periodic review notes, change notices to representatives |
For how the post-approval stage turns into specific triggers, see Material Change: When to Reopen a KYP Assessment.
Both the SEC staff bulletin and FINRA single out complex and risky products for additional procedures, training and supervision. The table below groups the product types named in regulatory guidance with the additional measures that guidance describes. It is a starting point for a firm's own categorization.
| Product Type | Guidance | Additional Measures |
|---|---|---|
| Leveraged and inverse ETPs, derivatives, margin strategies | SEC staff bulletin (2023); FINRA 12-03 | Specific procedures, training and heightened supervision |
| Structured products | FINRA 05-59; FINRA 12-03 | Training on each product before selling; scenario analysis - see Structured Products |
| Private placements | FINRA 10-22 and 23-08 | Reasonable investigation of issuer, management, assets and use of proceeds - see Alternatives & Private Markets |
| Deferred variable annuities | FINRA Rule 2330 | Specific written procedures and training programs - see Segregated Funds & Annuities |
| Crypto asset securities, penny stocks | SEC staff bulletin (2023) | Heightened scrutiny and specific procedures |
FINRA's finding that some firms' procedures restate the rule without saying how the firm complies is the clearest guide to what written procedures need to do.
The example below shows what product-level Reg BI procedures might cover. It is illustrative; each firm's procedures should reflect its products, business model and legal advice.