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Ed Slott: Advisors Falling Behind on Reg BI Rollover Compliance

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The Securities and Exchange Commission’s Regulation Best Interest requires advisors and broker-dealers to have a process to document their rollover recommendations — something most advisors don’t have, warns IRA and tax specialist Ed Slott.

“Most advisors don’t have a process in place to cover what the SEC Reg BI requires as to giving the clients the pros and cons of each option — roll over to an IRA, keep the funds in the plan, take a lump-sum distribution, convert to a Roth IRA or any combination of these,” Slott, of Ed Slott & Co., told ThinkAdvisor in a Monday interview. “Reg BI requires a process for this.”

Said Slott: “My feeling is if more advisors were doing this, I would be getting questions.”

Having such plans in place now is crucial as advisors “are processing a flood of rollovers due to layoffs” from the pandemic, Slott said.

While Reg BI has only been in effect since June 30, “my feeling is advisors are doing all these rollovers without really going through all this, and then they’ll get blindsided two years later when there’s some SEC audit[or] that says: ‘Well, when you rolled Mrs. Smith’s $400,000, show me the process you used going through all the options and the pros and cons.’”

Fred Reish, partner at Faegre Drinker Biddle & Reath in Los Angeles, agreed with Slott’s assessment, stating in a Monday email: “I think it’s largely true.”

Reish said he’s helped a few broker-dealers with such Reg BI-related rollover policies. “With one I helped develop a rollover recommendation process,” Reish said. “With others I helped them develop rollover education materials. Rollover education, if done properly, is not a recommendation and, thus, is not subject to Reg BI.”

SEC Chairman Jay Clayton warned advisors and broker-dealers on June 15 that they must take special care when recommending 401(k) or 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.

“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.

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