SEC Warns Advisors On Account Selection For Clients

SEC Charges AR Capital

Nearly two years later, the SEC staffers have been trying to assist financial professionals (including those who are registered as both investment advisors or brokers) in determining which type of account –brokerage, fee-based advisory, etc. – is best for their client.

On Wednesday, Commission staff published guidance about the subject. While the regulations of a brokerage relationship with a registered investment adviser may differ from one with a fiduciary, they conclude that both will be in compliance with the spirit and the letter of the regulations.

The staff of the SEC wrote that Reg BI and IA may have different applications and trigger at different times. However, the staff believes they produce substantially similar results in terms the ultimate responsibilities owed retail investors.

According to staff, each standard is based on key fiduciary principles. Therefore, it is important that you collect similar information and perform an analysis in order to arrive at the same conclusion about which account types would be best for retail investors, regardless of what capacity you are serving.

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The new guidance can be reduced to this analysis. Additional disclosures to clients about fees and possible conflicts and detailed documentation will strengthen the analysis. The staff claims that if you don’t have enough information from the client, it is impossible to make a reasonable case for why account recommendations are in the best interests of retail investors.

Staff from the commission made it clear that brokers and advisors have an obligation to inform clients in what capacity they are acting. They also asked firms to create their own guidelines to assist client-facing staff with these disclosures. The staffers of the commission advised that dual registrants who have not yet decided where the client’s account will reside, “should assume both standards apply” and inform the client that they are acting in both capacities.

The guidance of staff is not intended to be a statement about SEC policy and it does not indicate that the commission has adopted any new approach. Chairman Gary Gensler thanked the staff for their work on this issue and noted that investors rely on advisors and brokers to help them choose the right investments, strategies and accounts to achieve their goals.

Gensler stated in a statement that it was important for investors to trust that any advice or recommendations received are best for their interests.

Reg BI was criticized from the beginning by investor advocates, who complained that it did not go far enough to state regulators. They recently concluded brokers continued to engage with all manner of self-serving behavior even after Reg BI became law.

The association of North American securities administrators (Naaa) has been performing a series exam to see how brokers are implementing the rule. They also asked the SEC for clarifications on Reg BI in order to improve compliance.

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The president of Nasaa, Melanie Lubin (Maryland Securities Commissioner), was not available immediately to comment on the SEC guidance.

A spokeswoman for the group stated that “At this stage, Nasaa will require more time to dive into this report.” “We haven’t had the chance to fully assess the SEC staff bulletin and all its elements.”

Despite this, SEC’s staff guidance today seems to provide the type of compliance explanation Reg BI critics are looking for, even if it focuses more on account selection than product recommendations.

Experts in compliance recommend that advisors and other registered parties pay careful attention to any guidance from regulators. This is especially true when it concerns significant and relatively recent developments such as Reg BI. These will continue to be a focus of SEC examiners for many years to come.

Today’s bulletin is a follow-up to an update of exam priorities that the SEC published yesterday. It noted that “dually licensed RIAs” and “broker-dealers remain an area of concern” at the Division of Examinations. According to the revised exam priorities, dual registrants’ exams will be “particularly focused on potential conflicts of interests present at these firms including account recommendations and allocations of investments across various accounts.”

According to the exam division, it will look for high-feet or proprietary products that are sold or recommended. It will also consider compensation or other incentives that might encourage advisors or brokers to place their own interests above their clients’.

This sounds very similar to the language used in today’s bulletin about account selection. In which SEC staff pointed out bluntly that “you must always consider cost when making an account recommendation.”

Staff note that enforcement actions have been taken by the commission against advisors who steered clients towards high-cost products when there were cheaper and equally as sound alternatives. This expectation is also true for account placement.

The staff stated that Reg BI and IA do not require you to recommend the lowest-cost account. However, they both require you have a reasonable basis for believing that the account recommendation is in the best interests of the retail investor. “[I]f a higher-cost account is recommended, you must still have a reasonable basis to believe that it is in the best interests of the retail investor. This can be based on other factors as well as the specific situation and needs of each retail investor.

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