RIA Compliance Blog
The Securities and Exchange Commission (SEC) recently released a Staff Bulletin regarding the Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors. Since the adoption of Regulation Best Interest, or Reg BI, in 2019, the SEC has issued guidance and best practices for adoption of the policies and procedures expected for compliance with the regulation. We have previously written about the best interest standard applied to retirement rollover recommendations and the SEC’s announcement of the first enforcement case being filed under Reg BI.
The Staff Bulletin, presented in a Q&A format, provides the SEC’s views on how financial professionals can fulfill their obligations to retail investors when making account recommendations. The obligations discussed include the applicable standard for making account recommendations, factors to consider when making account recommendations, how and when cost is a factor, retirement rollover considerations, client account preferences, and developing and implementing a compliance plan reasonably designed to address Reg BI.
While Reg BI and the investment adviser fiduciary standard differ, the SEC points out that both standards require an account recommendation to be in the client’s best interest and prohibits an investment adviser from placing its interest ahead of a client’s interest. Additionally, the SEC states that a firm that does not evaluate sufficient information about a retail investor, it will not have the ability to form a reasonable basis to believe its account recommendations are in the retail investor’s best interest.
To help establish a reasonable insight into an investor’s profile, an investment adviser should consider the investor’s financial situation and needs, investments, assets and debts, marital status, tax status, age, investment time horizon, liquidity needs, risk tolerance, investment experience, investment objectives and financial goals, anticipated investment strategy, level of sophistication, and need for on-going account oversight and management. If a broker-dealer or investment adviser cannot establish a reasonable basis for recommendations, the SEC notes that it may be improper to make recommendations until the necessary investor information is obtained.
After establishing an investor’s profile and investment goals, an adviser should consider account recommendations that complement the profile and goals, and should weigh the investor’s best interest against the services and products provided to the account, the anticipated costs to the investor, alternative account types, and whether the account offers the services and products required by the investor. The SEC Bulletin provides that the existence of a special feature or need would not alone create a reasonable belief that an account recommendation satisfied the best interest standard but should be considered in connection with the investor’s needs, objectives, and preferences.
From a compliance standpoint, the SEC believes that comprehensive policies and procedures should address factors to be considered to establish an investor’s profile and make account recommendations and provide a mechanism to document and preserve the basis for account recommendations. In addition, the SEC believes that best practices for policies and procedures would remove any incentive, both compensation and non-compensation incentive, for opening certain account types, recommending one account type over another, and supervising rollover recommendations from one account type to another.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.