SEC emphasizes weighing costs of account recommendations

Brokers and investment advisers must consider costs and other investment options for clients when they make recommendations about opening accounts and rolling over retirement assets, the SEC said in a staff bulletin posted on its website Wednesday.

The Securities and Exchange Commission released the document to provide guidance to brokers and advisers about how they can comply with Regulation Best Interest, the broker standard of conduct, and the Investment Advisers Act, which governs advisers.

The bulletin does not impose new rules, but reiterates information that can be found in the Reg BI final rule as well as other guidance the SEC has released since it was implemented in June 2020.

The bulletin is the first of several that will emphasize that the agency takes the best-interest requirements at the heart of the broker and adviser standards seriously and expects financial advisers to do the same, an SEC official told reporters.

In congressional testimony last year, SEC Chairman Gary Gensler said the agency will use guidance and enforcement to ensure Reg BI fulfills its investor-protection promises.

“Many [investors] rely on broker-dealers and investment advisers to help them choose the investments, strategies, and accounts to meet their goals,” Gensler said in a statement. “It is important that investors can trust that the advice or recommendations they receive are designed to serve their best interests.”

Under Reg BI, brokers can't put their financial interests ahead of their customers’ interests. Under the Advisers Act, investment advisers have a fiduciary duty to their clients. The staff bulletin asserted that both regimes should result in a similar standard of care.

“Although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the staff’s view, they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors,” the bulletin states.

When it comes to helping a client decide whether to open an advisory or brokerage account, the SEC said brokers and advisers must consider account fees and commissions, as well as fees associated with mutual funds and other investment products, and assess reasonably available alternatives.

“Selection of an account type is a consequential decision for retail investors and is associated with potentially significant conflicts of interest and raises particular issues for financial professionals operating within dually registered or affiliated firms, as well as dually licensed financial professionals,” the bulletin states.

Recommending the lowest-cost account isn't a requirement under either Reg BI or the Advisers Act. Other factors that can be considered include whether a particular kind of account offers services, products or strategies that are good for a client.

But the bulletin warned that if clients are put in a more expensive account, it must be justified based on their particular needs.

“The Commission has pursued enforcement actions against investment advisers for recommending higher-cost products to clients when similar, lower-cost products were available,” the bulletin states.

When making a recommendation to roll over funds from a company 401(k) retirement plan to an individual retirement account, brokers and advisers must consider the costs of the existing plan and the new plan, as well as the level of services and investment options available, among other factors.

Prior to a rollover transaction, a financial adviser must determine if it would be better for the client to stand pat.

“In the staff’s view, it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan,” the bulletin states.

The bulletin recommends addressing conflicts of interest in account recommendations by avoiding compensation and non-pay incentives that reward the opening of certain types of accounts.

The best way for brokers and advisers to prove they’re complying with Reg BI and the Advisers Act is to put it in writing.

“It is the staff’s view that 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 retail investors without documenting the basis for such conclusions,” the bulletin states.