SEC Staff Bulletin: Account Recommendations

InvestorCOM recently chatted with David Porteous from Faegre Drinker, Ed Wegener from Oyster Consulting LLC, and Tom Selman from Scopus Financial Group to discuss the SEC and FINRA’s focus on Reg BI’s Care Obligation.

Parham Nasseri [PN]: The SEC’s notice around account type recommendations dates back to March 29, 2022 and sets clear expectations around what the SEC is expecting specifically for dual registered advisors. David in your opinion, what’s the SEC’s intention with respect to this Staff Bulletin?  

David Porteous [DP]: This Bulletin is foundational to the establishment of the account relationship, but it’s a decision tree regarding the economics of the account that you’re going to have. So irrespective of the products and the reasonably available alternatives they’re in, at the end of the day, an account type recommendation is a type of product. Whether the product and services that are going to accompany it are brokerage and those services are priced in a different way, then they’re saying that advisory services are no different in the decision tree analysis than when you’re making other types of recommendations of a specific product. So, they need to be filtered through the same reasonably available alternative style of analysis.  

How did you arrive at the decision to recommend that this person should have a brokerage account versus an advisory account? More importantly, as is often the case, you may be dealing with a host of accounts that are coming over with one client or a family.  

So how did you parse between them? In the context of a dual IA BD, obviously, those systems need to be substantial and evaluating that in the context of an IA or a BD. Moving beyond best interest and looking at it purely from an advisory standpoint, as an RIA you still have to look at how you made the recommendation that this person should be transitioning from a brokerage to an advisory account. As to the rollover piece, I think the experience last year with PTE 2020-02 reinforces that cost and economic decision since it’s irreversible in terms of coming out of a plan into an IRA and is something that has to be taken equally seriously and likewise the documentation around that decision-making recommendation. 

[PN]: Thanks, Dave. Let’s look a little deeper into the sets of requirements that came out. What was surprising to me was the specific call out that the SEC expects financial professionals to assess reasonably available alternatives when it comes to account-type recommendations. What do you make of this? 

Ed Wegener [EW]: I think that there may have been a perception that the available alternatives requirement only applied to product recommendations. As David mentioned, while it does apply to product recommendations, the SEC was clear in their Bulletin that they believe that both broker-dealers under the requirements under Reg BI and investment advisors, with their fiduciary obligations, are also required to consider reasonably available alternatives when making account type recommendations. So, when recommending account types, firms need to make sure that the account types they’re recommending go through a best interest evaluation which considers the spectrum of account types that are offered by the firm. And while the SEC was specific that firms only need to consider those account types that the firm offers, they did say that having a limited menu of account types or limitations to these things aren’t going to justify recommending an account type that’s not in a customer’s best interest.  

In the Bulletin the SEC outlines a number of things that they expect firms to consider when assessing different available alternatives with regard to account types. Customer-specific type factors like a customer’s financial situation, needs, objectives, and goals, as well as specific account-type factors like costs, the services and products that are offered within the account type, and the different types of accounts that are available. My takeaway having reviewed is that firms really need to make sure when they’re assessing their procedures for account type recommendations, that they’re ensuring that they have a process for evaluating and considering the reasonably available alternative account types as part of that process. That includes providing training to the reps and advisors in terms of how they should do that analysis between account types and then also making sure that the reps and advisors have access to the available information that they need to assess the different account types against the customer’s needs and objectives and make sure that the recommendations that they’re making with respect to the account type is in a customer’s best interest. 

[PN]: Thank you for sharing that. Tom, what do you make of the blurring of the lines around regulatory expectations between advisors’ and broker dealers’ sales practices?  

Tom Selman [TS]: The Staff Bulletin does blur the lines between the fiduciary requirements for an investment advisor and Reg BI. The Staff Bulletin says that although Reg BI and the investment advisor’s fiduciary duty are applied differently in some ways, they “generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors”.  

I have three points about that statement around the blurring of the line between the fiduciary standard and Reg BI.  

  1. First, it’s not really a surprise. Before the adoption of Reg BI, regulators were faced with a nagging difference between the fiduciary duty for investment advisors in the suitability rule that applied to broker-dealers. The differences were made more complicated by the fact that over time, more and more broker dealer reps were associated with an investment advisor and vice versa. Today about 85% of all advisor reps are also registered reps of a broker-dealer, so when you have different standards that are applied to the same person based on very similar types of recommendations, it becomes difficult for a regulator to deal with. One of the main points of Reg BI was to try to resolve these disparities and bring those standards closer together, so this blurring shouldn’t really surprise us, although I think it’s the first time the SEC staff has said that so boldly.  
  1. My second point is that the statement confirms what others have felt for a long time – which is the SEC will not amend Reg BI anytime soon. Folks, particularly on the investment advisor side who are aficionados of fiduciary duty, would argue that Reg BI falls short of the fiduciary standard – it’s really not as good. The staff acknowledges that the standards yield similar results. In fact, that is what they said, and therefore there’s really no reason for the SEC to undertake a significant revision of Reg BI.  
  1. The third point, which is the practical point I wanted to make, is that I think the principles of the fiduciary standard should be considered when you develop and manage your Reg BI compliance systems. And similarly, the principles under Reg BI you should consider when you’re developing and managing your fiduciary systems for an investment advisor, assuming you’re a dually registered firm. Many firms are duly registered, and I advise these firms to essentially build the chassis of your compliance system on Reg BI and the FINRA rules because they’re much more specific concerning the regulators’ expectations. And then on that chassis for the investment advisor side, add whatever remaining issues there are that are specific to the fiduciary duty for investment advisors. There shouldn’t be a lot if we’re talking about the sales process and the recommendation to customers, they’re so similar so I think it’s much easier to begin with the specificity of Reg BI and the federal rules and then branch onto that and build onto that the additional requirements that might pertain to the fiduciary standard. 



If you enjoyed this article, you can listen to the full discussion online – Watch the replay of the webinar, 2023: SEC and FINRA’s Focus on Reg BI’s Care Obligation. 

If you would like to learn how InvestorCOM’s compliance platform is helping firms meet their care obligation requirement to assess reasonably available alternatives, sign up to see a demo.