Recommending Rollovers in the Evolving Regulatory Environment (Part 3)

In Parts 1 and 2 of this post, we talked about the current and proposed rules applicable to rollover recommendations by broker-dealers and RIAs. Part 1 discussed the DOL and FINRA rules that apply now. In Part 2, we explained the SEC proposals. In this post, we talk about how to make a compliant rollover recommendation, regardless of which set of rules applies.

(“Rollover recommendation” refers to advice to a retirement plan participant to take a distribution of his or her account and roll it over to an IRA that is being advised by the broker-dealer or RIA.)

General Standards

Before discussing the factors an advisor must consider, let’s review the general standards for making the recommendation:

  • The ERISA standard is the prudent process. The advisor must use “care, skill, prudence and diligence” and engage in a thorough investigation, which means gathering relevant information and evaluating that information in light of the needs and circumstances of the participant. In other words, the SEC’s proposals and the DOL’s vacated rule are remarkably similar on rollover recommendations, though the SEC’s proposal applies to all recommendations and the DOL’s rule would only have applied in the case of plans subject to ERISA.
  • The SEC’s Reg BI imposes similar requirements and uses similar wording. It refers to FINRA Regulatory Notice 13-45, which, like the ERISA requirement, says an advisor must obtain information about important factors (see below) and assess it in light of the investor profile. In addition to making sure the recommendation is “suitable,” Reg BI and the SEC’s RIA interpretation say it must be in the “best interest” of the participant. It then goes on to say that the advisor and his firm owe the participant a duty of loyalty, i.e., their interests cannot supersede those of the participant.

Stated simply, regardless of which rule is being applied, to satisfy the best interest and loyalty standards, an advisor (of a broker-dealer or an RIA) must use and document a process of gathering and carefully and professionally considering the relevant information.

Relevant Factors

What are the relevant factors? We think the two best sources are Regulatory Notice 13-45 and the DOL’s Best Interest Contract Exemption (BICE). Notice 13-45 is especially relevant since the SEC refers to it in Reg BI (and elsewhere). In essence, FINRA and the DOL said that advisors must consider, among other factors, the following:

  • the investments, services and expenses in the plan;
  • the investments, services and expenses for the proposed rollover IRA;
  • information about the participant, e.g., needs, financial objectives and risk tolerance;
  • though not required, other factors, such as participant preferences, outside assets, other family investments, and so on.

Why are we suggesting that advisors look at BICE? After all, it was vacated by the Fifth Circuit in June. But we think it reflects the DOL’s current thinking and is helpful guidance in trying to apply a “best interest” standard. Further, the DOL might use this list in enforcement actions against advisors who are plan fiduciaries making rollover recommendations. Also, FINRA and the SEC may defer to the DOL’s thinking in this area.

Keep in mind, though, the alternative we mentioned in Part 1…to provide participants with education about their options and not make a recommendation that triggers the best interest requirements.


In making rollover recommendations, good risk management suggests that broker-dealers and RIAS should develop policies, procedures and supervisory practices for gathering and considering the relevant information mentioned earlier: information about the plan investments, services and costs; and do a comparison with the same information in the proposed IRA, taking into account the investment profile of the participant.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Fred Reish

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

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