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Regulation and Compliance > Federal Regulation

4 Must-Knows for Advisors in SEC's New Reg BI Guidance

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While the Securities and Exchange Commission’s recently released guidance on Regulation Best Interest’s Care Obligation is focused mainly on broker-dealer compliance, the alert offers several must-knows for advisors, says Amy Lynch, founder and president of FrontLine Compliance.

The SEC’s bulletin, released on April 20, zeroes in on how advisors and brokers should comply with their care obligations when providing investment advice and recommendations to retail investors.

In the Q&A, SEC staffers focuses primarily on the Care Obligation of Regulation Best Interest for broker-dealers and the duty of care enforced under the Investment Advisers Act of 1940 for investment advisors.

Lynch told ThinkAdvisor in a recent email that advisors should take note of the following four items:

1. Advisors can’t rely on a firm-approved list of investments.

Question 4 of the bulletin describes how advisors “cannot rely upon due diligence performed on investments by the firm itself,” Lynch explained. “This means that the use of a list of ‘firm-approved investments’ cannot be relied upon to satisfy the care obligation alone,” Lynch told ThinkAdvisor.

“Advisors must also do their own analysis of the approved investment options on a client-by-client basis,” she added. ”This is a good reminder to firms and advisors as the use of approved lists of investments has increased since Reg BI.”

2. Firms must train advisors on their products (and document it well).

The staff bulletin “referred to the use of employee training in multiple sections regarding how an advisor can be sure to understand the products and investment strategies they recommend,” Lynch said. “Firms should make sure their training programs are well documented, attendance is tracked, and advisors that miss training attend make-up sessions or participate in documented online training.”

3. Making the best choice from a narrow list is not enough.

The question on “most appropriate”  “makes it very clear that making the best recommendation from a limited menu of available options will not meet the care obligation,” Lynch warned. “In this case, no recommendation may be made if the ‘most appropriate’ is not in the client’s best interest. Firms may be forced to broaden their offerings now based upon this very clear response from staff.”

More firms, Lynch added, “may go the open-architecture route.”

4. For dual registrants, account type matters.

The last two questions for dual registrants “are helpful as advisors sometimes get confused as to which hat they are wearing and when,” Lynch pointed out. The SEC staff “made it clear that the type of account for which the recommendation is made becomes a determining factor.”

Also, she said, “the type of account to be opened in the case of a new client or relationship — BD or RIA — is another factor dual registrant advisors should consider when making recommendations to clients. The duty of care extends to the account type, not just the recommendation itself.”


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