Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor

Regulation and Compliance > Federal Regulation > SEC

SEC Warns Advisors on Rollovers Under Reg BI

By Melanie Waddell

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • BDs and advisors are to use caution when recommending rollovers to retail clients so as not to run afoul of Reg BI, fiduciary duty
  • Brokers and advisors must always consider costs when making recommendations, Hauptman said.
  • Dually registered advisors must disclose their capacity under both Reg BI and the IA fiduciary standard when making recommendations.

The Securities and Exchange Commission is warning broker-dealers and advisors to use caution when recommending rollovers out of a retirement plan to retail clients so as not to run afoul of their obligations under Regulation Best Interest and the Advisers Act fiduciary standard.

In a just-released guidance bulletin in Q&A form, the SEC reiterates the standards of conduct for broker-dealers and advisors when they are making account recommendations to retail investors.

“The guidance makes clear that a careful consideration of a rollover recommendation includes a consideration of leaving the assets in the plan,” Micah Hauptman, director of investor protection for the Consumer Federation of America, told ThinkAdvisor in an email.

The guidance “also suggests that it’d be very risky for firms and professionals to recommend rollovers without first obtaining plan information that allows a careful assessment of the costs and benefits of staying in the plan versus rolling out of the plan,” Hauptman said.

The SEC states that “when making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest.”

Specific factors are also “potentially relevant to rollovers that [BDs and advisors] should generally consider when making a rollover recommendation to a retail investor,” the SEC states.

“These factors include, without limitation, costs; level of services available; features of the existing account, including costs; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock,” according to the agency.

Hauptman noted on Twitter that a key point in the guidance is that “BOTH Reg BI (for brokers) and fiduciary duty (for advisers) are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest.”

Also, he tweeted, “brokers and advisers must ALWAYS consider costs when making recommendations. If they recommend a higher cost account, they must have a reasonable basis to believe the account recommendation is nonetheless in the retail investor’s best interest based on other factors.”

Dually Registered Duties

Dually registered advisors must disclose their capacity under both Reg BI and the IA fiduciary standard when making a recommendation, the SEC notes.

Under Reg BI, when making an account recommendation, a dually registered advisor “must disclose all material facts relating to the scope and terms of your relationship with the retail investor, including the capacity in which you are acting,” the guidance states.

Investment advisors have a similar obligation under the duty of loyalty to disclose all material facts relating to the advisory relationship, including the capacity in which they are acting.

Where the advisor has not yet established the capacity in which they’ll be acting — as an advisor or broker — the advisor “should assume that both standards apply and disclose to the investor, prior to or at the time of the recommendation, that you are acting in both capacities,” the SEC said. “Firms should provide clear guidance, through policies and procedures and other instructions to their financial professionals, on how to disclose capacity to retail investors.”

Melanie Waddell

@Think_MelanieW

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.