Reg BI and Suitability Practice Questions for the SIE

Answer: Make a recommendation of a securities transaction or investment strategy to a retail customer

Regulation Best Interest (SEC Exchange Act Rule 15l-1, effective June 2020) is triggered by one thing: a **recommendation** of a securities transaction or investment strategy made to a **retail customer** — a natural person who uses the recommendation primarily for personal, family, or household purposes. Both halves matter, and each wrong answer breaks one of them. Choice A breaks the recommendation trigger by attaching the rule to execution. A customer who calls in her own order without any suggestion from the representative has not received a recommendation, so Reg BI does not apply to that trade (the ticket is marked unsolicited). Choice D makes the same mistake in a different place: account opening by itself is not a recommendation. What does apply at account opening — and continuously afterward — is FINRA Rule 2090 (Know Your Customer), which requires reasonable diligence to know the essential facts about every customer whether or not anyone ever recommends anything. Choice C breaks the retail limit. Reg BI does not reach institutional customers; a recommendation to a corporate pension plan or a bank is governed by FINRA's suitability rule and general fair-dealing obligations instead. One point worth noting for scope: a recommendation does not have to be a recommendation to buy. Recommendations of account types (including rollover recommendations) and recommendations to **hold** a security are covered too.

The Trap: Believing Reg BI attaches to order execution or account opening rather than to recommendations, and that it covers institutional as well as retail customers

• Execute any order for any customer, whether solicited or unsolicited: Misconception: Reg BI attaches to every transaction the firm handles. It attaches to recommendations, not to execution — unsolicited orders are outside its scope.
• Make a recommendation to any customer, including institutional customers: Misconception: Reg BI applies to institutional customers. Reg BI reaches retail customers only; institutional accounts fall outside it.
• Open a new account for a customer, whether or not any recommendation is made: Misconception: conflating Reg BI's recommendation trigger with the Know Your Customer duty, which is what actually applies at account opening with or without a recommendation.

Verified against: misconception pairs: institutional scope, KYC-vs-suitability trigger); SEC Regulation Best Interest, Exchange Act Rule 15l-1; FINRA Rule 2090

Answer: Disclosure, Care, Conflict of Interest, and Compliance

Regulation Best Interest (SEC Exchange Act Rule 15l-1) is satisfied by complying with four component obligations, easily remembered as **D-C-C-C**: - **Disclosure** — before or at the time of the recommendation, disclose in writing the material facts about the relationship: scope and terms, capacity, fees and costs, and material conflicts. - **Care** — exercise reasonable diligence, care, and skill to understand the recommendation, have a reasonable basis to believe it is in the retail customer's best interest, and consider reasonably available alternatives and cost. - **Conflict of Interest** — maintain written policies to identify and then eliminate, or at minimum disclose and mitigate, conflicts. Product-specific sales contests and quotas tied to recommendations of particular securities to retail customers are prohibited outright. - **Compliance** — maintain written policies and procedures reasonably designed to achieve compliance with Reg BI as a whole. Choices B and D both import fiduciary language. That is the single most-tested confusion in this area: Reg BI is a best-interest standard for broker-dealers, while investment advisers are held to a separate fiduciary standard under the Investment Advisers Act. Choice D is the more dangerous version because three of its four items are right — the missing piece is Compliance. Choice C swaps in FINRA Rule 2111's three suitability components (reasonable-basis, customer-specific, quantitative). Those are real and heavily tested, but they belong to FINRA's suitability rule, not to Reg BI. Keep the two lists in separate mental drawers: four obligations for Reg BI, three components for 2111.

The Trap: Substituting investment-adviser fiduciary vocabulary (loyalty, prudence) or FINRA 2111's three suitability components for Reg BI's four component obligations

• Disclosure, Loyalty, Care, and Prudence: Misconception: Reg BI equals the investment-adviser fiduciary standard. Loyalty and prudence are fiduciary vocabulary, not Reg BI's component obligations.
• Disclosure, Care, Conflict of Interest, and Fiduciary: Misconception: Reg BI is a fiduciary standard. Three of these are genuine, but the fourth is Compliance — there is no 'fiduciary obligation' inside Reg BI.
• Reasonable-basis, Customer-specific, Quantitative, and Disclosure: Misconception: conflating Reg BI with FINRA Rule 2111. The first three named here are 2111's suitability components, a separate framework.

Verified against: teaching angle D-C-C-C; misconception pair: Reg BI = fiduciary duty); SEC Regulation Best Interest, Exchange Act Rule 15l-1

Answer: Both broker-dealers and registered investment advisers file it; for investment advisers it is Part 3 of Form ADV

Form CRS is the brief, plain-English client relationship summary that tells a retail investor what kind of firm they are dealing with: services offered, fees and costs, standard of conduct, conflicts, disciplinary history, and questions the investor should ask. **Who files it:** both broker-dealers and registered investment advisers. Dual registrants prepare one covering both. The point of the form is precisely to let an investor compare the two business models side by side — so limiting it to broker-dealers (choice A) defeats its purpose. Choice A also sets up a false contrast: an adviser's client relationship summary is delivered as Part 3 of Form ADV, so it is not 'Form ADV instead of Form CRS.' **When it is delivered:** at or before the earliest of (1) making a recommendation, (2) placing an order, or (3) opening an account. Notice the logic — the form is meant to inform the relationship decision, so it always arrives at the front end. That is why choice B's '30 days after' framing is wrong; a summary delivered after the customer has already committed cannot do its job. Choice D confuses two different disclosures. Form CRS is a short summary document. Reg BI's Disclosure Obligation is a separate and fuller requirement to disclose material facts about the scope and terms of the relationship, capacity, fees, and material conflicts before or at the time of a recommendation. Delivering Form CRS does not discharge it.

The Trap: Believing only broker-dealers file Form CRS, or misstating its delivery timing as a post-account-opening deadline

• Only broker-dealers file it; registered investment advisers use Form ADV instead: Misconception: Form CRS is a broker-dealer-only document. Both file it — and for advisers the client relationship summary IS a part of Form ADV, so 'instead' is a false contrast.
• It must be delivered no later than 30 days after the customer's account is opened: Misconception: Form CRS is an after-the-fact disclosure. Delivery is required at or before the earliest of a recommendation, an order, or account opening — never a grace period afterward.
• Delivering it satisfies Regulation Best Interest's Disclosure Obligation, so no further disclosure is required: Misconception: Form CRS substitutes for Reg BI's fuller disclosure obligation. Form CRS is a short summary; the Disclosure Obligation is broader and separate.

Verified against: misconception pair: Form CRS vs Reg BI disclosure obligation, who files); SEC Form CRS / Form ADV Part 3

Answer: "No — Reg BI is a best-interest standard that applies to a broker-dealer's recommendations; investment advisers are held to a separate fiduciary standard under the Investment Advisers Act."

This is the most conceptually tested pair in this topic, and the exam wants a precise answer rather than a comfortable one. Regulation Best Interest (SEC Exchange Act Rule 15l-1) requires a broker-dealer making a recommendation to a retail customer to act in that customer's best interest and not to place its own interests ahead of the customer's. It is a genuine, enforceable standard — but it is **not** the fiduciary standard investment advisers owe under the Investment Advisers Act, which is an ongoing relationship-wide duty of loyalty and care rather than a recommendation-by-recommendation obligation. The SEC deliberately built Reg BI as a separate regime rather than extending the adviser standard to broker-dealers. Choice A collapses that distinction. Choice C errs in the opposite direction. Reg BI is meaningfully more demanding than the older suitability framework: it requires acting in the customer's best interest (not merely recommending something suitable), requires consideration of reasonably available alternatives and cost, and adds standalone Disclosure, Conflict of Interest, and Compliance obligations. 'Same thing, new name' is wrong. Choice B ties the standard to the compensation model. It does not work that way — Reg BI turns on whether a recommendation was made to a retail customer, not on whether the representative earns a commission or an asset-based fee. Note also the related titling restriction: a representative of a broker-dealer only, without adviser status, generally may not hold themselves out as an 'advisor' or 'adviser.'

The Trap: Equating Reg BI with the investment-adviser fiduciary standard (or dismissing it as a renamed suitability rule)

• "No — Reg BI is just the old suitability standard under a new name.": Misconception: Reg BI merely restates suitability. Reg BI is a heightened standard that adds disclosure, conflict, and compliance obligations and requires acting in the customer's best interest.
• "Yes, but only on the fee-based portion of your account; commission-based trades are held to a lower standard.": Misconception: the standard of conduct is set by how the representative is paid. Reg BI applies to recommendations to retail customers regardless of the compensation arrangement.
• "Yes — Reg BI imposes on broker-dealers the same fiduciary standard investment advisers owe under the Investment Advisers Act.": Misconception: Reg BI = fiduciary duty. Reg BI is a best-interest standard for broker-dealers; the adviser fiduciary standard is a separate regime with a different structure.

Verified against: titling restriction; misconception pair: Reg BI = fiduciary duty); SEC Regulation Best Interest, Exchange Act Rule 15l-1; Investment Advisers Act of 1940

Answer: The rollover advice is itself a recommendation subject to Reg BI, because Reg BI expressly covers recommendations of account types, including rollovers

The rollover recommendation is the flagship application of Reg BI, and it is where the rule's scope is broadest. Reg BI (SEC Exchange Act Rule 15l-1) covers recommendations of any securities transaction **or investment strategy involving securities**, and the SEC expressly included recommendations of **account types** — such as moving from a workplace retirement plan to an IRA, or from a brokerage account to an advisory account — within that phrase. So the advice here is a covered recommendation even before a single security is chosen inside the new IRA. Choice B is the error the question is built around: students picture Reg BI as a rule about picking stocks and funds, and miss that recommending the *container* is itself a recommendation. Under the Care Obligation the representative must have a reasonable basis to believe the rollover is in the customer's best interest — which means actually weighing the alternative of leaving the money in the plan, comparing fees and available investments, and considering services and any surrender or penalty consequences. Choice C misplaces the timing. The obligation attaches when the recommendation is made. A recommendation the customer rejects was still a recommendation, and it still had to be in her best interest when given. Choice D inverts the role of compensation. The fact that the representative's firm will earn fees on the rolled-over assets does not switch Reg BI on — it is a **material conflict of interest** that the Disclosure and Conflict of Interest Obligations require the firm to disclose and mitigate. The recommendation is what triggers the rule; the compensation is what has to be managed under it. Separately, recommendations to **hold** a security are also covered — Reg BI is not limited to recommendations that generate a transaction.

The Trap: Believing Reg BI covers only recommendations of specific securities, so account-type and rollover recommendations fall outside it

• Reg BI applies only if the representative earns commissions or fees as a result of the rollover: Misconception: compensation is the trigger. Compensation creates a conflict that must be addressed, but the trigger is the recommendation to a retail customer.
• Reg BI does not apply, because it covers only recommendations of specific securities, not recommendations about account types: Misconception: Reg BI is limited to security-level recommendations. Account-type and rollover recommendations are named as covered recommendations.
• Reg BI does not apply unless and until the customer accepts the recommendation and the assets are actually transferred: Misconception: the obligation attaches at execution. Reg BI attaches when the recommendation is made, whether or not the customer ever acts on it.

Verified against: hold recommendations covered; teaching angle: rollover as flagship application); SEC Regulation Best Interest, Exchange Act Rule 15l-1

Answer: A natural person who receives a recommendation and uses it primarily for personal, family, or household purposes, regardless of her net worth

Reg BI's 'retail customer' definition has two moving parts, and each distractor attacks one of them. A retail customer is (1) a **natural person**, or the legal representative of a natural person, who (2) uses the recommendation **primarily for personal, family, or household purposes**. Choice C states both parts and adds the detail that most often surprises students: there is **no wealth ceiling**. A multimillionaire investing her own money for her own household is a retail customer just as fully as a first-time investor. That is why choice B fails — accredited-investor status governs who may buy certain private offerings; it has nothing to do with Reg BI's retail definition. Choice A is the institutional carve-out viewed from the wrong side. A pension plan committee acting for the plan is not a natural person acting for personal, family, or household purposes, so Reg BI does not apply. Two things still do, though: FINRA Rule 2090 (Know Your Customer) applies to every customer, and FINRA Rule 2111 suitability still governs the recommendation — subject to the institutional-customer exemption available where the institution is capable of evaluating investment risks independently, exercises independent judgment, and affirmatively indicates it is doing so. Choice D is the broadest version of the error: treating Reg BI as a general customer-protection rule covering everyone and everything. It is narrower than that by design — recommendations, to retail customers. A useful way to hold the three regimes together: KYC covers **every customer**; suitability covers **every recommendation**; Reg BI covers **retail recommendations** — successively narrower circles.

The Trap: Misdefining 'retail customer' — extending Reg BI to institutional accounts or imposing a wealth/sophistication ceiling on retail status

• A corporate pension plan's investment committee that receives a recommendation and exercises independent judgment in deciding what to buy for the plan: Misconception: Reg BI reaches institutional customers. An institutional account is outside Reg BI, and it may also qualify for FINRA 2111's institutional exemption.
• A natural person who receives a recommendation, but only if she does not qualify as an accredited investor: Misconception: wealth or accreditation removes retail status. Reg BI's retail-customer definition has no net-worth ceiling.
• Any person or entity that places an order through the firm, because Reg BI covers all of a broker-dealer's customers: Misconception: Reg BI is a universal customer-protection rule. It is limited to recommendations made to retail customers.

Verified against: teaching angle: KYC ⊃ suitability ⊃ Reg BI Venn diagram; misconception pair: Reg BI applying to institutional customers); SEC Regulation Best Interest, Exchange Act Rule 15l-1; FINRA Rules 2090 and 2111

Answer: Quantitative suitability

FINRA Rule 2111 has three components, and this fact pattern is engineered to separate them: - **Reasonable-basis** — does the representative understand the product well enough to believe it is suitable for at least *some* investors? - **Customer-specific** — is this recommendation suitable for *this* customer's investment profile? - **Quantitative** — is the *number of recommended transactions*, taken together, excessive and unsuitable in light of the customer's investment profile? (FINRA removed the older 'actual or de facto control over the account' element from this obligation effective June 30, 2020, to conform with Regulation Best Interest, so excessive volume alone can implicate it.) The scenario tells you explicitly that each security fit the customer's profile, which is the examiners' way of ruling out customer-specific suitability (choice C) — the classic misclassification here. And nothing suggests the representative misunderstood the securities, which rules out reasonable-basis (choice A). What is wrong is the **volume**: high turnover and a cost-to-equity ratio that eats the account. That is the quantitative prong, and it is churning's home. Turnover rate, cost-to-equity ratio, and in-and-out trading are its standard indicators. Choice D states the intuition the quantitative prong was written to defeat. Suitability is not evaluated only one ticket at a time. A series of individually defensible trades can still be excessive taken as a whole, and when they are generated for the representative's commissions rather than the customer's benefit, that is churning. For contrast, the mirror-image abuse is **reverse churning** — parking a buy-and-hold, largely inactive customer in a fee-based account where the ongoing fee is not justified by activity or services.

The Trap: Classifying a churning fact pattern as customer-specific suitability, or concluding that individually suitable trades cannot add up to a violation

• None — because each individual recommendation was suitable for the customer, a pattern of them cannot violate the suitability rule: Misconception: suitability is purely trade-by-trade. The quantitative prong exists precisely to reach excessive volume built from individually acceptable trades.
• Reasonable-basis suitability: Misconception: applying the product-understanding prong to a trading-volume problem. Nothing suggests the representative failed to understand the securities themselves.
• Customer-specific suitability: Misconception: the most common misclassification of churning. Customer-specific asks whether each recommendation fits the profile — and here each one did; the volume is the problem.

Verified against: misconception pair: three suitability types misapplied in a churning fact pattern) + Cluster 14 (churning indicators, reverse churning); FINRA Rule 2111 Supplementary Material .05; FINRA Regulatory Notice 20-18 (control element removed from quantitative suitability, eff. 2020-06-30)

Answer: Reasonable-basis suitability

Reasonable-basis suitability under FINRA Rule 2111 requires reasonable diligence to understand the potential risks and rewards of a recommended security or strategy, and a reasonable basis to believe it is suitable for **at least some** investors. It is the first gate: if a representative cannot describe how a product pays off or how an investor can lose money in it, he has not cleared that gate, and no amount of customer analysis rescues the recommendation. Reg BI's Care Obligation builds on the same idea for recommendations to retail customers, adding an obligation to consider reasonably available alternatives and cost. Choices A and B misroute to the other two prongs. Customer-specific suitability (A) asks whether the product fits *this* customer's profile — a question you cannot even reach until someone understands the product. Quantitative suitability (B) targets excessive trading volume in a controlled account, which is nowhere in these facts. Choice C is the most tempting wrong answer for anyone who has worked at a firm. Product-approval committees and due-diligence files are real and important — but that is the **firm's** reasonable-basis diligence. The rule contemplates diligence at both levels, and an individual representative cannot outsource his own understanding to a committee memo he never read. 'The firm put it on the shelf' is not a defense to recommending something you cannot explain. This is exactly why complex and structured products draw heightened supervisory attention.

The Trap: Missing reasonable-basis suitability by defaulting to customer-specific, or assuming firm product approval discharges the representative's own duty to understand

• Customer-specific suitability: Misconception: defaulting to the customer-specific prong. The facts identify a failure to understand the product itself, which precedes any customer-fit analysis.
• None — the firm's product committee approved the note for sale, which satisfies the representative's obligation to understand it: Misconception: firm-level approval discharges the individual's diligence duty. Reasonable-basis diligence applies at both the firm and the representative level.
• Quantitative suitability: Misconception: applying the excessive-trading prong where no trading volume issue exists. Quantitative suitability addresses the number of transactions, not product knowledge.

Verified against: misconception pair: three suitability types misapplied); FINRA Rule 2111; SEC Regulation Best Interest Care Obligation (Exchange Act Rule 15l-1)

Answer: Execute the order as instructed and mark the order ticket unsolicited

The pivot is who chose the security. Both FINRA Rule 2111 and Reg BI attach to **recommendations**. This customer brought the idea herself, so no recommendation was made, no suitability obligation attaches to the security selection, and the representative may enter the order — marking the ticket **unsolicited**, which is the record that documents exactly that. Choice B is the intuitive answer and the wrong one. A representative is not the gatekeeper of a customer's own decisions; customers are entitled to make investments their representative would not have suggested. (A firm may separately decline to handle particular securities as a matter of firm policy — but the facts here say the firm permits the trade.) Cautioning the customer, as this representative did, is good practice and does not obligate him to refuse the order. Choice C sets the trap this question is really built on: warning a customer about a security she raised is **not** soliciting it. Marking the ticket solicited would be an inaccurate record — and accurate order marking matters, because 'unsolicited' is precisely what evidences that no recommendation was made. Deliberately mismarking a solicited trade as unsolicited to dodge a suitability problem is a serious violation; the marking must reflect what actually happened. Choice D invents a waiver. Suitability obligations are not something a customer can sign away, and none is needed here in any event. Two related points worth carrying forward: FINRA Rule 2090 (Know Your Customer) applies to this account throughout, recommendation or not; and if the representative had instead advised her to **hold** a position, that would be a covered recommendation — the rules are not limited to buys and sells.

The Trap: Believing a representative must refuse an unsolicited order in a security he considers unsuitable, or that discussing the security's risks converts the order to solicited

• Execute the order only after obtaining the customer's signed waiver of the suitability rules: Misconception: a customer can waive suitability obligations by signature. Suitability duties are not waivable by customer consent, and no waiver is needed for an unsolicited order.
• Execute the order and mark it solicited, because he discussed the security and its risks with the customer before entering it: Misconception: any discussion of a security makes the order solicited. The marking turns on who suggested the trade, not on whether it was discussed.
• Refuse to execute the order, because a representative may not process a transaction in a security he believes is unsuitable for the customer: Misconception: an unsuitable security may never be traded. Suitability governs recommendations, not a customer's own investment decisions.

Verified against: misconception pair: rep must refuse an unsolicited unsuitable trade); FINRA Rules 2111 and 2090; SEC Regulation Best Interest, Exchange Act Rule 15l-1

Answer: The firm must still use reasonable diligence to know and retain the essential facts about the customer under FINRA's Know Your Customer rule, even though no suitability obligation has been triggered

This question separates two rules that students routinely fuse. They have **different triggers**. **FINRA Rule 2090 (Know Your Customer)** requires every firm to use reasonable diligence, in regard to the opening and maintenance of every account, to know the **essential facts** concerning every customer. Essential facts are the ones needed to effectively service the account, to act on any special handling instructions, to understand the authority of each person acting on the customer's behalf, and to comply with applicable laws and rules. Notice what is absent from that list: any mention of a recommendation. KYC applies to this account from day one and continues for as long as the account exists — which is why choice D fails. 'Maintenance' is doing real work in the rule; circumstances such as authority, address, or who is acting for the customer change over time. **FINRA Rule 2111 (Suitability)** and **Reg BI** (SEC Exchange Act Rule 15l-1) attach only when a recommendation is made. None was made here, so neither is triggered — which is why choice B fails. Self-directed, customer-initiated orders are unsolicited, and the firm is not obligated to evaluate each one against her profile. Choice A treats the two rules as a package deal that switches on together. They do not. The clean way to hold this: **KYC always; suitability only upon a recommendation** — successively narrower circles, with KYC covering every customer, suitability covering every recommendation, and Reg BI covering recommendations to retail customers. If this firm ever did make a recommendation — including a recommendation about an account type, a rollover, or a recommendation to **hold** — the suitability and Reg BI analyses would switch on at that moment, and the essential facts gathered under KYC would feed the customer investment profile (age, other investments, financial situation and needs, tax status, objectives, experience, time horizon, liquidity needs, and risk tolerance) used to evaluate it.

The Trap: Confusing the KYC trigger with the suitability trigger — assuming no recommendation means no obligations, or that KYC is a one-time account-opening task

• The Know Your Customer obligation was fully satisfied when the account was opened and does not continue thereafter: Misconception: KYC is a one-time onboarding checklist. The rule requires knowing essential facts on an ongoing basis, not only at opening.
• Neither the Know Your Customer rule nor the suitability rule applies, because no recommendation has ever been made: Misconception: KYC and suitability share the same trigger. Suitability requires a recommendation; KYC does not.
• Suitability obligations attach to every transaction in the account regardless of who initiated it, so the firm must evaluate each order against the customer's profile: Misconception: suitability attaches to all transactions. It attaches to recommendations; customer-initiated orders are unsolicited and exempt.

Verified against: investment-profile elements; misconception pair: KYC vs suitability trigger); FINRA Rules 2090 and 2111; SEC Regulation Best Interest, Exchange Act Rule 15l-1