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Vedder Thinking | Articles SEC Staff Issues Bulletin on Standards of Conduct for Broker-Dealers and Investment Advisers


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On March 30, 2022, the staff of the SEC’s Division of Trading and Markets published a bulletin in question-and-answer format that reiterates the standards of conduct for broker-dealers under Regulation Best Interest (Reg BI), and for investment advisers under the Investment Advisers Act of 1940’s fiduciary standard when making account recommendations to retail investors. The bulletin reminds broker-dealers and advisers of their obligations to act in the best interest of retail investors and not to place their own interest above those of investors. The following is a summary of key points addressed in the bulletin:

  • Financial professionals dually licensed as broker-dealers and investment advisers must follow the applicable standard when making account recommendations to retail investors based on the capacity in which they are acting. In some cases, both Reg BI and the Advisers Act may apply.
  • Under Reg BI, broker-dealers must disclose all material facts about the scope and terms of their relationship with the retail investor, including the capacity in which they are acting. Similarly, investment advisers have a duty of loyalty to disclose all material facts relating to the advisory relationship, including the capacity in which they are acting.
  • Under Reg BI and the fiduciary standard, broker-dealers and investment advisers, respectively, may recommend an account to a retail investor only when they have a reasonable basis to believe that the account is in the retail investor’s best interest. Firms should disclose material facts, including conflicts of interest, about limitations on their product or account offerings.
  • In determining whether an account recommendation is in a retail investor’s best interest, firms must have a reasonable basis to believe that an account is in a retail investor’s best interest. To establish this belief, firms should consider, among other things, a retail investor’s financial situation and needs, investment objectives and financial goals, and any other information the retail investor may disclose. A retail investor’s level of financial sophistication and the level of account monitoring by the firm should also be considered. Firms should also consider account characteristics, including the services and products provided in the account, costs, available alternative account types and whether the account offers the services the retail investor requests. Firms should decline to make account recommendations if they lack sufficient information to reasonably believe that a recommendation is a retail investor’s best interest.
  • In considering account costs, firms should consider both direct costs, such as account fees, commissions and transaction costs, and indirect costs, such as those associated with payment for order flow and cash sweep programs. Although firms are not obligated to recommend the least expensive type of account, when recommending a higher cost account, they should have a reasonable basis to believe the account is in a retail investor’s best interest based on other factors.
  • Broker-dealers and investment advisers should document the basis for account recommendations to retail investors in accordance with applicable recordkeeping requirements. The staff noted that it may be difficult for a firm to assess the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to retail investors without documenting the basis for its recommendations.
  • In making recommendations regarding retirement account rollovers, firms should consider factors such as costs, available service levels, existing account features, including costs, available investment options, the ability to withdraw funds penalty-free, required minimum distributions, protections from creditors and legal judgments and holdings of employer stock. The staff also noted that some rollovers are subject to Department of Labor regulations.

The staff provided a non-exhaustive list of best practices for firms to meet their obligations, including avoiding compensation thresholds tied to opening certain types of accounts, adopting and implementing policies and procedures to reduce or eliminate incentives for employees to favor one type of account over another, implementing supervisory procedures to monitor rollovers from one account type to another and adjusting compensation for professionals who fail to manage conflicts of interest in connection with account recommendations.

The staff bulletin is available here.


Jacob C. Tiedt