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SEC Staff Bulletin Discusses Account Type and Rollover Recommendations

April 14, 2022

The SEC issued a staff bulletin (bulletin) on March 30, 2022, providing staff views on how broker-dealers, investment advisers, and their associated persons (financial professionals) can satisfy their obligations to retail investors when making account-type recommendations (e.g., brokerage vs. advisory accounts). While the bulletin focuses on dually licensed financial professionals, it is not limited to those individuals, and we encourage members to review the staff’s guidance carefully. The bulletin notes that both Regulation Best Interest (Reg BI) for broker-dealers and the fiduciary standard for investment advisers under the Investment Advisers Act of 1940 (Advisers Act) are drawn from key fiduciary principles that include an obligation to act in the retail investor’s (investor) best interest and not to place their own interests ahead of the investor’s interest.

The IAA has long supported extending fiduciary principles to all financial professionals providing investment advice to investors. However, we believe that in an effort to raise the standards for broker-dealers and their associated persons, the SEC has, in some respects, glossed over the material differences between investment advisers and broker-dealers. It is important to recognize that, despite the migration of broker-dealers to advisory services, the core businesses of broker-dealers and investment advisers remain markedly different. Investment advisers and broker-dealers have fundamentally different business models and engage in a different range of activities. The standards of conduct applicable to each, while both focused on “best interest,” apply in fundamentally different ways. For example, investment advisers are fiduciaries to their clients in all aspects of their advisory relationship, while broker-dealers are subject to a transaction-based standard to act in their customer’s best interest at the time of and in connection with a recommendation.

Our concern is heightened by the recent guidance provided by the SEC staff on the use of “fiduciary” in Form CRS. While we appreciate that, for the first time, the staff formally confirms that investment advisers are permitted to use the words “fiduciary” or “fiduciary duty” in their Form CRS disclosures, the FAQ is replete with warnings of inappropriate use of the terms and provides no guidance as to what use would be considered appropriate, thus creating even more confusion. We are concerned that the FAQ will likely dissuade investment advisers from saying that they are fiduciaries in their Form CRS, even though investment advisers are fiduciaries as a factual matter and as a matter of law.

Investment advisers should be aware that the bulletin provides a detailed, non-exhaustive list of alternatives and costs for financial professionals to consider when making account-type recommendations and strongly encourages financial professionals to document the basis for the account that was recommended to the investor.

The bulletin also provides guidance on retirement account rollover recommendations. Even if an investment adviser is not subject to regulation by the Department of Labor related to rollover recommendations, the bulletin provides guidance on what factors the adviser should consider when making rollover recommendations and that the basis for those recommendations should be documented.

The bulletin provides guidance on account-type recommendations in several areas:

Dually licensed financial professionals’ obligations when recommending accounts to prospective retail investors.

The bulletin provides that the standard that dually registered financial professionals must follow depends on the capacity in which they are acting (broker-dealer, investment adviser, or both) and that the financial professionals must disclose to clients the capacity in which they are acting.

Factors to consider before making an account recommendation.

The bulletin provides that financial professionals should establish a reasonable understanding of the investor’s investment profile prior to account selection. It also provides several factors for financial professionals to consider, including the services and products provided in the account, the projected costs to the investor, alternative account types available, and whether the account offers the services requested by the investor.

Consideration of costs in account recommendations.

The bulletin provides that financial professionals must consider costs when making an account recommendation, including account fees, commissions and transaction costs, tax considerations, and indirect costs, such as those associated with payment for order flow and cash sweep programs. Financial professionals may also consider other factors including the investor’s need for certain services or certain types of investment products or strategies that are only available in certain account types, and any special or unusual features requested by the investor, such as tax advantages.

Retirement account rollover recommendations.

The bulletin provides that financial professionals must have a reasonable basis to believe that the rollover itself and the account being recommended are in the investor’s best interest. SEC staff believes that there are specific factors potentially relevant to rollovers that financial professionals should consider, including costs, level of services available, features of the existing account, available investment options, ability to take penalty-free withdrawals, application of required minimum distributions (RMDs), protection from creditors and legal judgments, and holdings of employer stock.

Investor preference for a particular type of account.

While an investor’s preference should be considered, the bulletin makes clear the staff’s view that a financial professional would not satisfy the applicable standard of conduct based on the investor’s preference alone. The bulletin does confirm that if the investor directs the financial professional to open an account that is contrary to the financial professional’s recommendation, the financial professional could proceed with the transaction, but is advised to document the investor’s instruction.

Documenting the basis for the account that was recommended to an investor.

While not requiring documentation of account-type recommendations, the bulletin states that when making an account-type recommendation, it may be difficult for a firm to assess periodically the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to investors without documenting the basis for the recommendation.

Examples of practices that can assist firms in meeting their obligations to address conflicts of interest.

The bulletin provides a non-exhaustive list of practices that can help firms meet their obligations with respect to conflicts of interest associated with account recommendations, including avoiding compensation thresholds that disproportionately increase compensation through openings of certain account types and adopting and implementing policies and procedures reasonably designed to minimize or eliminate incentives for financial professionals to favor one type of account over another.

An important takeaway from the bulletin is that it reflects that the SEC is focused on financial professionals making account-type recommendations to ensure that they are being made in investors’ best interests. The bulletin provides a roadmap for financial professionals to follow when engaging in their analysis.

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