The 74-Year-Old Client Who Wants 44% in One Drilling Program
Customer Margaret, 74, retired, has $900,000 in liquid net worth and $60,000 a year from a pension plus Social Security. She has been your customer for six years with a moderate risk profile. She wants to put $400,000 into a single Reg D oil-and-gas drilling program: seven-year lockup, no secondary market, $100,000 minimum, sponsor projecting an 18% IRR. She plans to buy a house in about two years and expects to use part of this money for the down payment. Your payout is a 6% selling commission. She says she understands the risk and 'wants in for the full amount.'
1. Under Regulation Best Interest, may you accept the full $400,000 as recommended?
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You should not. The care obligation requires a reasonable basis to believe the recommendation is in her best interest, judged against her investment profile and reasonably available alternatives - not against whether she is willing to sign.
The conflicts are concrete:
- Concentration: $400,000 is roughly 44% of her liquid net worth in one speculative, illiquid program.
- Liquidity mismatch: she has a two-year cash need for a house down payment, and the investment is locked for seven years with no secondary market.
- Income profile: her income is fixed; the position is not replaceable if the program underperforms.
- Compensation: a 6% commission creates an incentive to size the trade large, which the firm must mitigate and you must not let drive the recommendation.
A smaller allocation that preserves a liquidity reserve for the house, or a different product, is the defensible path. If she insists on the full amount, declining the recommendation is appropriate.
2. If you recommend a reduced allocation and she accepts, what should the file show?
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The file should let a reviewer reconstruct the judgment without you in the room:
- An updated financial profile confirming liquid net worth, fixed income, and the two-year cash need.
- The specific alternatives considered - a smaller allocation, a shorter-duration or more liquid product, or no action - and why they were rejected.
- The rationale for the amount recommended and how it preserves her house fund and emergency reserve.
- Disclosure of the 6% commission and any other conflicts, with her acknowledgment.
- Principal or heightened-supervision review, given her age and the product's risk profile, plus a trusted-contact designation if the firm's procedures call for one.
A bare signed risk acknowledgment is not documentation of best interest; it documents that she was warned, not that the recommendation was suitable.
3. Margaret says she read about the program herself and is directing the purchase. Does that end the analysis?
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Not automatically. Whether Reg BI applies turns on whether there was a recommendation, and a customer cannot convert a recommendation into an unsolicited order by saying the words 'I'm directing this.' If you pitched the program, discussed the projected IRR, or helped size the order, the firm should treat it as recommended.
If the order is genuinely unsolicited, Reg BI's care obligation is not triggered, but several things remain:
- The firm still needs supervisory procedures for private placements and for senior investors.
- Suitability and sales-practice rules can still apply depending on the firm's procedures and the facts.
- Any later statement by you that 'she brought it to me' should be accurate; a mischaracterization in the file is itself a records problem.
The clean path is to document what actually happened, not to engineer an unsolicited label.