The Convergence Continues: SEC Staff Bulletin on Standards of Conduct for B-Ds and RIAs

On March 30, 2022, the SEC issued “Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors” (SEC Retail Standards Bulletin). This guidance builds on prior SEC guidance regarding Regulation Best Interest (Reg BI) and the SEC’s “Main Street” initiatives impacting investment advisory firms since the SEC’s self-reporting “Share Class Selection Disclosure Initiative” announced just over four years ago. In the intervening years, the SEC issued a FAQ “Regarding Disclosure of Certain Financial Conflicts of Interest Related to Investment Adviser Compensation” and issued the Reg BI rulemaking package that included the “Commission Interpretation Regarding Standard of Conduct for Investment Advisers.” This blog has covered all of these developments and, regarding the once separate standards of conduct for brokerage and investment advisory firms, described the developing convergence of these standards as they apply to retail investors.

Many will recall that Reg BI drew controversy when it was approved by a Republican-majority SEC Commission in 2019 and implemented the following year. Investor advocates have criticized the rule for failing to define what is in fact in a retail customer’s “best interest.” The transition to a Democratic-majority SEC Commission under Chair Gary Gensler invited speculation that the SEC might take another look at Reg BI. Chair Gensler, however, told Congress last May that he would seek to “vigorously” enforce Reg BI as finalized and vowed to “get the most” out of it, but he also stated that he was inclined to “update and freshen” Reg BI if it did not end up adequately protecting investors.

The SEC Retail Standards Bulletin does not suggest any updates or refreshening to Reg BI or the fiduciary standard in the Investment Advisers Act of 1940 (IA Fiduciary Standard), but signals that the SEC staff will interpret these two sets of regulations as requiring similar efforts by firms when it comes to managing their conflicts of interest regarding recommendations to retail investors. Thus, the SEC Retail Standards Bulletin takes the next step in the convergence of these once distinct standards. Further, and consistent with Chair Gensler’s statements, this bulletin conveys that Reg BI and the IA Fiduciary Standard will be enforced in similar ways and vigorously. At the start, the guidance specifically states:

Both [Reg BI] for broker-dealers and the fiduciary standard for investment advisers under the Investment Advisers Act [IA fiduciary standard] are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest. Although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the staff’s view, they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors.



1. Dually licensed financial professionals’ obligations when recommending accounts to prospective retail investors.

a. How do I know which standard to follow when making account recommendations?[6]

Both Reg BI and the IA fiduciary standard require your account recommendations to be in the retail investor’s best interest and require you not to place your or your firm’s interests ahead of the retail investor’s interest.

This bulletin continues on with guidance through additional questions and answers. For purposes of this blog, we plan to focus on two areas of the SEC Retail Standards Bulletin: costs and rollovers.

Regarding costs, the bulletin provides solid, baseline guidance for the consideration of costs in account recommendations. As SEC guidance typically does, early on it provides that Reg BI and the IA Fiduciary Standard “do not always obligate the least expensive account type.” However, as many firms have experienced firsthand, SEC examiners and enforcement staff regularly place significantly more weight on the cost rather than other factors when evaluating recommendations made to retail clients. Thereby revealing clear direction to emphasize the evaluation of the cost associated with the recommendation. The SEC Retail Standards Bulletin advises that if a higher cost account or product is recommended then there must be a reasonable basis to believe that such a recommendation is nonetheless in the retail investor’s best interests. The guidance continues by advising that the “total potential costs,” including indirect costs that could be borne by the retail investor, need to be evaluated, along with the time horizon. The SEC Retail Standards Bulletin outlined some of the types of costs that should be considered, such as account fees, commissions, transaction costs, tax considerations, payment for order flow, and the costs of cash sweep programs. This guidance further notes that the assessment of costs should also include fees associated with the investment products, such as management fees, distribution and servicing fees, and the costs of investing in funds, including front-end and back-end fees.

Regarding rollovers, the SEC Retail Standards Bulletin continues with this guidance:

4. Retirement Account Rollover Recommendations[19]

a. Are there additional factors that I should consider when making a rollover recommendation in order to have a reasonable basis to believe the recommendation is in the retail investor’s best interest?

Yes. When making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest. In addition to the factors discussed above, the staff believes that there are specific factors potentially relevant to rollovers that you should generally consider when making a rollover recommendation to a retail investor. 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.[20]

As with account recommendations more generally, relevant factors should be considered in light of, among other things, the retail investor’s investment profile to develop a reasonable belief that the retirement account or rollover recommendation is in the retail investor’s best interest.[21] 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.

In addition to Reg BI and the IA fiduciary standard, some rollovers also are subject to regulation by the Department of Labor. 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.[22]

Regarding the first paragraph above, the SEC staff’s position is consistent with the Department of Labor’s (DOL’s) discussion of rollover recommendations in the preamble to Prohibited Transaction Exemption (PTE) 2020-02. That is, in order to make a compliant “best interest” rollover recommendation, a broker-dealer or investment adviser must have information about the plan’s investments, services and expenses, among other factors. While the SEC didn’t directly discuss the issue of the availability, the DOL permits, under certain circumstances, the use of alternate data for plan investments, services and expenses. That “alternate data” includes the investment and expense information on the accountant’s reports attached to the Form 5500 and benchmarking information for plans of similar sizes and types.

Regarding the second paragraph, while the SEC staff suggests that the basis for a rollover recommendation should be documented, the DOL’s PTE requires that, beginning July 1 of this year, participants and IRA owners be provided, in writing, the “specific reasons” why the rollover recommendation is in the best interest of participant or IRA owner.

b. When considering a rollover recommendation, do I have to consider the option of leaving the retail investor’s investments in the employer’s plan

As discussed above, you must have a reasonable basis to believe that an account recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest. In the staff’s view, it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option. To evaluate any recommendation to transfer assets out of an employer’s plan, or between individual retirement accounts, you would need to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan.[23]

Again, the SEC staff’s views are in alignment with the DOL’s. The discussion in the preamble to PTE 2020-02 requires that the four options available to most participants be considered. Those options are: leave the money in the plan, roll over to an IRA, take a taxable distribution, or transfer the money to the plan of a new employer. As a practical matter, even for DOL purposes, in most cases the viable alternatives will be to leave the money in the plan or to roll over into an IRA.

We strongly urge brokerage and investment advisory firms and their representatives to fully familiarize themselves with this SEC guidance and to apply it to their particular business models, policies, procedures, and practices. For any questions or concerns with the SEC Retail Standards Bulletin and its potential impact on your firm’s business model, please contact the Faegre Drinker Best Interest Compliance Team.

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: Sandra D. Grannum

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense. She is co-chair of the Commercial Litigation Team.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

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