Rollover Recommendations – Do the SEC and DOL Requirements Align?

Key Takeaways

The SEC and the DOL have separately issued guidance on rollover recommendations – however, a close examination indicates that the guidance by both agencies is very similar. The SEC’s guidance for broker-dealers is in Regulation Best Interest and a recent Staff Bulletin on account recommendations. The DOL’s guidance about rollover recommendations came in the form of an expanded interpretation of fiduciary advice found in the Preamble to PTE 2020-02 and a set of Frequently Asked Questions. These pieces of guidance share the following three principles: (1) a best interest standard, (2) a process to support that best interest standard that requires consideration of relevant factors about the investor, the investor’s current retirement account and the recommended rollover account, and (3) documentation supporting the basis for the recommendation.

There are a few differences between the SEC and the DOL guidance that broker-dealers and their registered representatives should know about, including that the SEC rollover guidance is applicable to a much broader array of retirement plans and accounts, and also that the SEC guidance does not require a disclosure about the best interest reasons for the rollover recommendation as does the DOL under PTE 2020-02.


As we have discussed in previous posts, the DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), (the “PTE”) allows broker-dealers and their registered representatives (investment professionals) to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to private sector tax-qualified and ERISA-governed retirement plans, participants in those plans, and IRA owners (collectively, “retirement investors”). Also, in the Preamble to the PTE, the DOL expanded its interpretation of fiduciary advice. As a result of that expanded interpretation, many more broker-dealers and their investment professionals are fiduciaries for their recommendations to retirement investors – including rollover recommendations – and therefore will need the protection provided by the PTE.

The SEC’s guidance about rollover recommendations by broker-dealers and their investment professionals first appeared in the SEC’s “best interest” rulemaking package that included “Regulation Best Interest: The Broker-Dealer Standard of Conduct” (“Reg BI”). More recently, the SEC issued Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors which provides specific guidance about rollover recommendations.

Best Interest Standard

Both the SEC and the DOL impose a best interest standard that reflects the ERISA concepts of prudence and loyalty. As explained by the SEC in Reg BI:

The revised obligation, in requiring the broker-dealer to ‘‘exercise reasonable diligence, care and skill’’ and to have a “reasonable basis to believe that the recommendation is in the best interest. . . and does not place’’ the interest of the broker-dealer ahead of the interest of the retail customer, will continue to require an analysis that is comparable to the notion of ‘‘prudence’’ as described in other regulatory frameworks, but does so using the terms ‘‘diligence, skill, and care’’—terminology with which broker-dealers are familiar and that is well understood under the federal securities laws.

 Best Interest Process

In addition, the SEC’s best interest process involves the same general approach as does that of the DOL – namely:

  • Obtaining information about the retirement investor;
  • Obtaining information about the investments, services and expenses of the retirement investor’s current retirement account and the recommended rollover account; and
  • Evaluating the information collected to determine the option that is in the retirement investor’s best interest.
Obtaining Information about the Retirement Investor

The SEC staff explains that in order to have a reasonable basis to believe a recommendation is in the retirement investor’s best interest, an investment professional should consider investor characteristics, such as —

the retail investor’s: financial situation (including current income) and needs; investments; assets and debts; marital status; tax status; age; investment time horizon; liquidity needs; risk tolerance; investment experience; investment objectives and financial goals; and any other information the retail investor may disclose to you in connection with an account recommendation. The staff also believes that you should consider, without limitation, the retail investor’s: anticipated investment strategy (e.g., buy and hold versus more frequent trading); level of financial sophistication; preference for making their own investment decisions or relying on advice from a financial professional; and the need or desire for account monitoring or ongoing account management.

Similar to this approach, the DOL’s best interest standard under PTE 2020-02 requires that the recommendation be “based on the investment objectives, risk tolerance, financial circumstances and needs” of the plan participant. In other words, in the view of both agencies, the best interest process is not a one size fits all approach, but instead requires that the investment professional consider what is important for satisfying that particular participant’s needs – e.g., active management, wider array of investments, asset allocation services, periodic withdrawals, sustainable income, etc.

Obtaining Information About the Current Retirement Account and the Recommended Rollover Account

The SEC staff points out that in addition to information about the retirement investor, there are specific factors about the current retirement account and the account being recommended that should be considered:

These factors include, without limitation, costs; level of services available; features of the existing account, including costs; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock.

The DOL also references factors like these in describing the comparative analysis of the current plan account and proposed rollover account that should be undertaken to determine whether a rollover is in the best interest. Further, the DOL says that a best interest recommendation requires that the broker-dealer and investment professional consider not only two options — leaving the money in the current retirement account or rolling it over to an account with the investment professional — but also the investor’s other options. These other options may include rollover to the plan of a new employer (if the employee is switching jobs and the plan accepts plan rollovers) or taking a taxable distribution.

The SEC does not mention these other alternatives; however, rolling over to a new plan — if available — is an account type that may need to be considered in determining which account type is in the best interest of the investor. Further, the SEC staff highlights the importance of complying with the conditions of PTE 2020-02 if a broker-dealer is relying on it — and in that case, all of the investor’s options should be considered:

If you are relying on Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”), you may want to review guidance from the Department of Labor on factors to consider in making a rollover recommendation, as well as relevant documentation requirements.

Documenting the Basis for the Recommendation

A condition of PTE 2020-02 is that the broker-dealer retain for six years the underlying documentation necessary to prove compliance with the PTE conditions, including the best interest standard. While the SEC does not require a specific documentation or retention obligation, the SEC Staff points out the importance of retaining documentation of compliance:

In the staff’s view, when making a rollover recommendation, 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 the recommendation.

DOL vs. SEC — Two Significant Differences

As indicated above, the DOL and SEC guidance on rollover recommendations is very similar. However, there are two significant differences.

One is that the DOL’s rules apply only to rollover recommendations from ERISA-governed plans, private sector qualified plans and IRAs. The SEC’s rules apply to rollover recommendations from all plans, including non-ERISA plans such as government plans.

The second is that the DOL’s PTE 2020-02 requires that, when a rollover recommendation is made, the participant must be provided, in writing, with the “specific reasons” why the rollover recommendation is in the best interest of the participant. The SEC does not require this. However, a fair reading of the SEC Staff Bulletin is that a broker-dealer and its representatives must have “specific reasons” why the rollover recommendation is in the best interest of the retirement investor.


The SEC and DOL requirements for satisfying the best interest standard for rollover recommendations is very similar. For plans covered by the fiduciary and prohibited transaction rules in ERISA and the Internal Revenue Code, broker-dealers need to have compliant practices that satisfy both SEC and DOL standards. In fact, it would appear that compliance with the DOL requirements will satisfy the guidance in the SEC Staff Bulletin. And, even for plans not covered under ERISA or the Code, it could be that the most efficient course of action for SEC compliance would be to apply the DOL approach to those rollover recommendations.

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.

About the Author: Joan M. Neri

Joan Neri represents plan service providers – including broker-dealers and registered investment advisers – and employer plan sponsors and counsels them on fulfilling their obligations under ERISA and complying with the Internal Revenue Code rules governing retirement plans and accounts. Joan advises on ERISA fiduciary status and responsibilities, avoidance of prohibited transactions, the considerations associated with structuring, developing and offering investment products and services to ERISA plans and day-to-day plan operational compliance issues.

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