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Regulation and Compliance > Federal Regulation > SEC

SEC Reg BI Must Include Rollovers: Morningstar

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The Securities and Exchange Commission’s proposed Regulation Best Interest for brokers must be revised to ensure that rollover recommendations are in an investor’s best interest, according to Morningstar.

In the fund-rating group’s comment letter to the SEC on its proposed advice standard package, Aron Szapiro, director of Policy Research for Morningstar, told the agency that Reg BI needs to identify rollovers “as specifically requiring a prudent process and documentation to ensure they are in retirement investors’ best interests.”

Rollovers, Szapiro wrote, particularly from retirement accounts covered by the Employee Retirement Income Security Act of 1974, “require additional scrutiny because most financial professionals have an incentive to recommend that clients roll over their assets.”

(Related: O’ No! Ken Fisher Tells SEC to Ban Use of ‘Advisor)

Further, “participants in ERISA-covered retirement accounts often enjoy institutional pricing for investments and high levels of protections because of ERISA’s strict fiduciary standards,” he wrote.

While the preamble to the SEC’s advice standard’s package “makes it clear that rollover recommendations are covered by the rule, the final regulation should specifically identify broker/dealers’ responsibilities when recommending a rollover,” Szapiro stated.

The Morningstar comment letter notes that flows into mutual funds paying unusually high excess loads declined after the Labor Department proposed its fiduciary rule in 2015 – a shift that Szapiro states was “statistically significant.”

The reduction “in the distortionary effect of conflicted payments suggests that firms put in place effective policies and procedures to mitigate conflicts of interest in response to the DOL rule and, further, that the SEC’s proposal could maintain this important momentum,” he wrote.

In its fiduciary rule, Labor’s economic analysis focused on the harms to consumers from advisors’ conflicts of interest focused on load-sharing, Szapiro explained.

“Load-sharing payments flow from asset managers to intermediaries that sell funds, creating a conflict by giving intermediaries an incentive to sell products for which they collect a higher payment rather than products in the best interest of an investor, all other things equal,” he wrote.

To sustain this reduction in load sharing payments, Szapiro told ThinkAdvisor in  separate comments that Reg BI “needs a clear requirement to ensure rollover recommendations are in an investors’ best interest,” as well as “disclosure not only that financial institutions have a conflict of interest but also how a financial institution mitigates the conflict.”

Also needed are “additional specific disclosures on revenue-sharing, load-sharing and other potential conflicts of interest. All that said, the way the proposed regulation is written, a lot of its effectiveness will also come down to future SEC decisions on when and how to enforce the regulation.”

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