§ 240.15l-1 Regulation Best Interest.

Regulation Best Interest establishes a standard of conduct for broker-dealers and their associated persons when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. The standard is separate from, and in addition to, antifraud obligations under the federal securities laws and FINRA suitability obligations.

(a) Best Interest Obligation.

A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of the broker or dealer making the recommendation ahead of the interest of the retail customer.

(1) Disclosure Obligation.

Prior to or at the time of the recommendation, the broker-dealer must provide the retail customer, in writing, full and fair disclosure of:

- (i) All material facts relating to the scope and terms of the relationship with the retail customer, including: (A) that the broker, dealer, or such natural person is acting as a broker, dealer, or an associated person of a broker-dealer with respect to the recommendation; (B) the material fees and costs that apply to the retail customer's transactions, holdings, and accounts; and (C) the type and scope of services provided to the retail customer, including any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer. - (ii) All material facts relating to conflicts of interest that are associated with the recommendation.

The Disclosure Obligation may be satisfied, in part, through delivery of Form CRS (see § 240.17a-14 below). Oral disclosure to supplement written disclosure is permissible only when appropriate; the firm must make and keep records of any oral disclosure.

(2) Care Obligation.

In making the recommendation, the broker, dealer, or natural person who is an associated person of a broker or dealer must exercise reasonable diligence, care, and skill to:

- (i) Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; - (ii) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile and the potential risks, rewards, and costs associated with the recommendation, and does not place the financial or other interest of the broker, dealer, or such natural person making the recommendation ahead of the interest of the retail customer; and - (iii) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile.

The Care Obligation subsumes the three components of the traditional suitability standard (reasonable-basis, customer-specific, and quantitative suitability) and adds a requirement that the recommendation be in the retail customer's "best interest" and that it not place the broker-dealer's interests ahead of the customer's.

(3) Conflict of Interest Obligation.

The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to:

- (i) Identify and at a minimum disclose, in accordance with paragraph (a)(1) of this section, or eliminate, all conflicts of interest associated with recommendations to retail customers; - (ii) Identify and mitigate any conflicts of interest associated with recommendations that create an incentive for a natural person who is an associated person of the broker-dealer to place the interest of the broker-dealer or such natural person ahead of the interest of the retail customer; - (iii) (A) Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations, in accordance with paragraph (a)(1) of this section; and (B) prevent such limitations and associated conflicts of interest from causing the broker-dealer or a natural person who is an associated person of the broker-dealer to make recommendations that place the interest of the broker-dealer or such natural person ahead of the interest of the retail customer; and - (iv) Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.

Note: paragraph (a)(3)(iv) prohibits outright — not merely disclose or mitigate — certain types of sales-contest-style incentive programs tied to specific securities within a limited time window. General bonuses tied to total production remain permissible.

(4) Compliance Obligation.

In addition to the policies and procedures required by paragraph (a)(3), the broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.

(b) Definitions.

For purposes of this section:

(1) Retail customer.

"Retail customer" means a natural person, or the legal representative of such natural person, who:

- (i) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and - (ii) Uses the recommendation primarily for personal, family, or household purposes.

A natural person with assets exceeding any threshold does not cease to be a retail customer; there is no "high-net-worth exclusion." The use-based test is dispositive. An individual investor purchasing securities in a retirement account is a retail customer; an individual investing personal savings in a brokerage account used for business working capital generally is not, provided the "primarily for personal, family, or household purposes" element fails.

(2) Retail customer investment profile.

"Retail customer investment profile" includes, but is not limited to, the retail customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer, or a natural person who is an associated person of a broker or dealer in connection with a recommendation.

(3) Recommendation.

"Recommendation" is not defined by rule. The Commission has indicated that whether a communication constitutes a recommendation depends on the facts and circumstances, including whether the communication reasonably could be viewed as a "call to action" and whether it reasonably would influence an investor to trade a particular security or group of securities. The staff has consistently treated the following as recommendations:

- Account recommendations (e.g., to open, transfer, or roll over an account); - Recommendations of specific securities; and - Recommendations of investment strategies involving securities (including recommendations regarding the use of margin, leverage, day-trading, or options strategies).

Education, general marketing, and impersonal investment advice that is not directed at any particular person generally does not rise to the level of a recommendation.

(c) Interaction with existing suitability rule.

Regulation Best Interest does not replace FINRA Rule 2111 (Suitability) but layers an enhanced standard on top of it for recommendations to retail customers. Firms should not treat a Reg BI recommendation as compliant merely because it would have been "suitable" under Rule 2111; the Care Obligation requires an affirmative best-interest determination and consideration of reasonably available alternatives when that consideration is part of having a reasonable basis to believe the recommendation is in the retail customer's best interest.

(d) Records.

Records relating to compliance with Regulation Best Interest — including records of the information collected from or provided to retail customers, the disclosures provided under paragraph (a)(1), and the policies and procedures required by paragraphs (a)(3) and (a)(4) — must be preserved in accordance with Rule 17a-4(e)(5) for at least six years, the first two years in an easily accessible place. See also Rule 17a-3(a)(35), which imposes a record-making requirement tied to Reg BI.

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§ 240.17a-14 Form CRS — Relationship Summary.

Rule 17a-14 requires a broker-dealer that offers services to retail investors to file with the Commission and deliver to each retail investor a relationship summary (Form CRS) that provides information about the firm. The parallel Advisers Act rule is § 275.204-5 for SEC-registered investment advisers; dual-registrants may deliver a combined relationship summary.

(a) Preparation and filing of the relationship summary.

Every broker or dealer registered under section 15 of the Securities Exchange Act of 1934 that offers services to a retail investor shall:

- (1) Prepare a relationship summary that complies with the requirements of Form CRS; - (2) File with the Commission electronically through the Central Registration Depository (Web CRD) system operated by FINRA (or any successor system), using the instructions in Form CRS; and - (3) Amend the relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate, and file the amended relationship summary with the Commission within 30 days by the same method.

The relationship summary is a standalone document and is limited to two pages for a single-registrant firm or four pages for a dual-registrant (broker-dealer + investment adviser). Formatting must use the headings, order, and machine-readable design specified in Form CRS.

(b) Delivery to retail investors.

(1) Initial delivery.

A broker or dealer must deliver the current relationship summary to each retail investor before or at the earliest of:

- (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; - (ii) Placing an order for the retail investor; or - (iii) The opening of a brokerage account for the retail investor.

(2) On request.

A broker or dealer must deliver the current relationship summary to an existing retail investor within 30 days upon request.

(3) Communication of material changes.

Following an amendment, a broker or dealer must communicate any changes made to the relationship summary to each retail investor who is an existing client or customer within 60 days after the amendments are required to be made, and without charge. The communication can be made by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor.

(c) Content of Form CRS.

Form CRS is structured around five required items, each answered using the prescribed headings and, in several places, the exact prescribed text known as "conversation starters":

Item 1. Introduction.

State the firm's name, that the firm is registered with the SEC as a broker, dealer, or investment adviser (or both), that brokerage and investment advisory services and fees differ, and that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS.

Item 2. Relationships and Services.

Describe the principal brokerage services offered to retail investors, including any material limitations (e.g., proprietary products, a limited menu of investments, account minimums). Include the prescribed conversation starters:

- "Given my financial situation, should I choose a brokerage service? Why or why not?" - "How will you choose investments to recommend to me?" - "What is your relevant experience, including your licenses, education, and other qualifications? What do these qualifications mean?"

Item 3. Fees, Costs, Conflicts, and Standard of Conduct.

Under "What fees will I pay?" describe the principal fees and costs that retail investors will incur. Under "What are your legal obligations to me when providing recommendations? How else does your firm make money and what conflicts of interest do you have?" describe the firm's obligations under Regulation Best Interest, how the firm makes money, and the conflicts of interest that result. Include the conversation starter: "How might your conflicts of interest affect me, and how will you address them?"

Item 4. Disciplinary History.

State whether the firm or its financial professionals currently disclose, or have legal or disciplinary history. Provide a specific, yes-or-no answer to this question. Include the conversation starter: "As a financial professional, do you have any disciplinary history? For what type of conduct?" Direct retail investors to Investor.gov/CRS for a free and simple search tool.

Item 5. Additional Information.

State that additional information about the firm's brokerage services is available on the firm's website and provide a telephone number for retail investors to request up-to-date information and a copy of the relationship summary. Include the conversation starter: "Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Whom can I talk to if I have concerns about how this person is treating me?"

(d) Definitions.

"Retail investor" means a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family, or household purposes. Note: the definition is broader than "retail customer" in Reg BI because it includes prospective retail investors who have not yet received a recommendation.

(e) Recordkeeping.

A broker-dealer must make and keep records of the dates on which each relationship summary and amendment thereto was provided to any retail investor, including any retail investor who subsequently becomes a customer. See § 240.17a-3(a)(24) for the record-making requirement and § 240.17a-4(e)(10) for the retention period (six years, with the first two in an easily accessible place).

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Cross-References

- FINRA Rule 2111 (Suitability) — Reg BI does not preempt Rule 2111; the Care Obligation adds a best-interest determination on top of the existing suitability analysis. - Investment Advisers Act Rule 204-5 (Form CRS for investment advisers) — a dually-registered firm delivers a single combined relationship summary that covers both its brokerage and advisory services. - Rule 17a-3(a)(25) and 17a-3(a)(35) — records required in support of Reg BI compliance and Form CRS delivery. - SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers — Account Recommendations for Retail Investors (Mar. 30, 2022).

Compliance notes for Kestrel Securities

Kestrel's retail brokerage arm is the principal consumer of Reg BI. Areas that have drawn staff attention in recent exam cycles:

1. **Account-type recommendations**, including recommendations to roll over a qualified retirement account into an IRA. These are "recommendations" under Reg BI and must be supported by a documented best-interest analysis considering the characteristics of the existing and recommended accounts. 2. **Rollover comparison files** must capture the fees and services of the existing plan, not merely those of the recommended IRA. 3. **Conflicts-of-interest inventory** should be refreshed at least annually and reviewed whenever a new product or incentive program is introduced. 4. **Form CRS delivery logs** must show date of delivery for each retail investor — a per-event record, not a quarterly summary.