Regulation Best Interest (Reg BI): Why Britehorn Chose to Stay Institutional

When the SEC adopted Regulation Best Interest (Reg BI) in 2019, the goal was straightforward: require broker-dealers to act in the best interest of retail investors when making investment recommendations. Few would argue with that objective — but most were surprised to learn of the restrictions and requirements now placed on soliciting investments from high-net-worth investors.

Like many well-intentioned regulations, Reg BI has had effects far beyond its original purpose. For many broker-dealers, it fundamentally changed how firms supervise registered representatives, document recommendations, and evaluate compliance risk — even for firms that have little interest in serving the retail wealth management market.  

At Britehorn Securities, we made a deliberate business decision after Reg BI came out: we do not supervise retail brokerage business. Instead, we focus exclusively on M&A and institutional capital raising and private placements. That decision benefits both our registered representatives and our compliance program.

What is Regulation Best Interest?

Regulation Best Interest (Reg BI) is an SEC rule that establishes a heightened standard of conduct whenever a broker-dealer makes a recommendation to a retail customer involving securities or an investment strategy.

Rather than merely recommending something that is “suitable,” the broker-dealer must act in the customer’s best interest and cannot place its own financial interests ahead of the customer’s. The rule also requires firms to satisfy four primary obligations:

• Disclosure

• Care

• Conflict of Interest

• Compliance

These obligations require firms to disclose material facts about recommendations, exercise reasonable diligence and care, identify and mitigate conflicts of interest, and maintain written supervisory procedures reasonably designed to achieve compliance with new guidelines.  

Who Is a “Retail Customer”?

One of the most misunderstood aspects of Reg BI is who it actually applies to.

The SEC defines a retail customer as:

“A natural person, or the legal representative of such natural person, who receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer and uses the recommendation primarily for personal, family, or household purposes.”  

In this context, "legal representative" means non-professional (non-regulated) representatives such as non-professional trustees, executors, conservators, guardians, individuals holding power of attorney, and similar non-professional fiduciaries acting for the individual. The common thread is that they’re standing in the shoes of the individual, not exercising independent professional investment judgment.

Notice what isn’t in that definition. There is no reference to:

• Accredited investors

• Qualified purchasers

• Qualified clients

• Net worth

• Income

• Investment sophistication

In fact, the SEC has specifically clarified that an accredited investor who is a natural person can still be a retail customer for purposes of Reg BI. Simply being wealthy does not exempt someone from the rule.  

This surprised many investment bankers and placement agents at the time — and continues to confuse those we speak to today. Previously, FINRA's definition of qualified and accredited governed who you could market to — and FINRA's Rule 4512(c) defines an institutional account (vs. a retail one) as a bank, insurance company, registered investment adviser, or "any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million." The SEC created an entirely new definition with a whole new set of regulations around it.

If a recommendation is made directly to a natural person for their own personal investment purposes — even if they are worth more than $50 million — Reg BI may still apply, regardless of their wealth or sophistication.

What about family offices?

To try and clear confusion around family offices specifically, The Securities Industry and Financial Markets Association (SIFMA) asked the SEC to confirm that broker-dealers would not be required to treat certain family offices as retail. The Division of Trading and Markets issued a No-Action Letter on December 23, 2020 saying it would not recommend enforcement action if a broker-dealer treated a qualifying family office as institutional instead of retail.

The relief is fairly narrow, however: the family office must first satisfy the Advisers Act definition of a family office, meaning it generally:

• serves only family clients,

• is owned and controlled by family members or family entities, and

• does not hold itself out to the public as an investment adviser.

Then it must also qualify as an Institutional Family Office (IFO) by meeting additional sophistication standards:

• at least $50 million in assets under management;

• employs (or retains) one or more knowledgeable investment professionals responsible for investment decisions;

• those professionals are capable of evaluating investment risks independently;

• the family office makes investment decisions independently rather than relying on a broker-dealer in the manner contemplated for retail customers; and

• the office confirms these representations to the broker-dealer.  

Notice that the SEC staff focused on actual sophistication and independence, not merely wealth.

Why Britehorn Doesn’t Support Retail Business

Britehorn was built for investment bankers — not retail financial advisors.

Our registered representatives primarily advise on mergers and acquisitions, institutional capital raises, and private placements involving sophisticated institutional investors. Because of that focus, we made the strategic decision not to supervise retail brokerage activity. That means our representatives cannot make investment recommendations directly to retail investors.

Our decision to no longer allow retail activity offers several advantages:

Lower supervisory complexity

Retail recommendations require an entirely different supervisory framework than institutional investment banking. Firms must review customer profiles, investment objectives, conflicts of interest, disclosures, and ongoing documentation supporting why each recommendation satisfied Reg BI. By limiting our platform to institutional work, our supervisory program remains focused on transaction execution rather than retail portfolio advice.

Less paperwork

Retail recommendations often trigger additional documentation requirements, including:

• Form CRS delivery

• Retail customer disclosures

• Recommendation documentation

• Additional supervisory reviews

• Enhanced compliance testing

For investment bankers whose business consists of selling companies or raising institutional capital, these requirements provide little practical value while creating significant administrative burden.

Lower regulatory risk

Every additional regulatory obligation creates another area where firms can be examined, and retail investors (as defined by Reg BI) are becoming an increasingly important area of focus for the SEC and FINRA, as stated in their own regulatory oversight priorities the last several years. By intentionally avoiding retail business, Britehorn reduces unnecessary regulatory complexity for both the firm and all our representatives, allowing everyone to focus on closing lower-risk, and often more lucrative, M&A and institutional transactions.

The Unintended Consequences of Reg BI

The objective of Reg BI is difficult to criticize. Investors deserve transparency and thoughtful recommendations. The implementation, however, has produced several unintended consequences.

Higher compliance costs

Implementing Reg BI required firms to revise supervisory procedures, train personnel, update disclosures, modify technology systems, create new documentation processes, and develop Form CRS. These costs can be significant, and will be passed down from broker-dealers to their reps.  

More time spent documenting

Many firms now devote substantially more time documenting recommendations and compliance processes. Documentation is important — but time spent creating paperwork is time not spent serving clients or executing transactions.

Confusion over “retail”

Many investment professionals assume “retail” simply means “small investors.” Traditionally, that has been the FINRA definition. But that isn’t how the SEC wrote the rule. A billionaire investing personal assets can still be a retail customer under Reg BI, while a much smaller institutional investor may not be. It seems counterintuitive, but it's the new reality. Understanding that distinction is critical when structuring capital raises and private placements.

Conflicts for independent professionals

One of the less-discussed practical consequences of Reg BI is that it can fundamentally change the risk profile for independent deal professionals. If you’re employed directly by a private equity firm, venture capital fund, or issuer, recommending your own firm’s investment products is generally expected — you represent a single organization. But an independent placement agent or investment banker working with multiple issuers may face more difficult questions if making recommendations to retail investors. Why was one client’s offering recommended instead of another? Was the recommendation driven by the client’s needs, or by differences in compensation or other incentives? Where previously, it was assumed a high-net-worth investor could make decisions for themselves, there is now a lot more scrutiny here.

Britehorn's Future-Looking Model

Britehorn intentionally focuses on work where our experience is deepest:

• Sell-side M&A

• Buy-side advisory

• Institutional private placements

• Institutional capital raising for operating companies and funds

By avoiding retail brokerage business altogether, we provide a compliance platform specifically designed for transaction professionals — not wealth managers. For investment bankers and institutional private placement agents, that’s a simpler model, a more focused supervisory environment, and one that aligns with how they've always conducted a majority of their business.

As regulatory requirements continue to evolve, understanding where Reg BI applies — and where it doesn’t — is becoming increasingly important. If you’re an investment banker or placement agent looking for a broker-dealer built around institutional transactions rather than retail brokerage, we’d be happy to discuss how Britehorn’s platform is different.