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Retirement Planning > Retirement Investing

SEC Chief Urges Caution on Rollovers Under Reg BI

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Securities and Exchange Commission Chairman Jay Clayton warned advisors and broker-dealers in a late Monday statement on the pending June 30 compliance date for Regulation Best Interest and Form CRS that they must take special care when recommending 401(k)/IRA rollovers and withdrawals, complex or risky products as well as coronavirus-related investments and SPACs, or special purpose acquisition corporations.

The application of Reg BI to recommendations of rollovers of and withdrawals from retirement accounts is one of the rule’s “most significant enhancements over the status quo,” Clayton said, and these recommendations “should be approached with care.”

Broker-dealers and advisors should be “particularly attuned” to their regulatory obligations in light of the additional flexibility Congress recently provided investors to take withdrawals from certain accounts.

The Coronavirus Aid, Relief and Economic Security (CARES) Act allows eligible participants in certain tax-advantaged retirement plans to take early distributions of up to $100,000 during this calendar year without being subject to early withdrawal penalties and with an expanded window for paying the income tax they owe on the amounts they withdraw, he explained.

“By waiving early withdrawal penalties and other limitations tied to retirement accounts, Congress provided investors with substantial flexibility to access these plans in order to weather financial hardships related to the pandemic,” Clayton said.

The SEC’s Office of Investor Education and Advocacy noted in a recent investor alert that some promoters are recommending that investors take CARES Act withdrawals or otherwise roll over retirement funds to invest in products they are soliciting.

“Firms should recognize that these recommendations are subject to Reg BI and ensure that their policies and procedures meet the requirements of Reg BI, the Advisers Act and Form CRS, as appropriate,” Clayton said.

When assessing COVID-19 related investments, Clayton warned that a broker-dealer’s recommendation to a retail customer regarding COVID-related investments “should be based, among other things, on an understanding of the potential risks, rewards and costs associated with the recommendation.”

An investment advisor, he said, “must have a reasonable belief that its advice, including its advice with respect to COVID-related investments, is in the best interest of the client, including a consideration of whether investments are recommended only to those clients who can and are willing to tolerate the risks of those investments and for whom the potential benefits may justify the risks.”

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