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In Case You Missed It: Broker Dealer Law Blog – Summer 2023

The Broker-Dealer Regulation & Litigation Digest is a periodic compilation of the most read blog posts published on the Broker-Dealer Law Blog during the last few months. Catch up on the latest insights on litigation, regulatory, compliance and fiduciary issues impacting broker-dealers and other financial services companies.

A New Opportunity for 529 Account Beneficiaries – Tax Free Rollovers to Roth IRAs

By Fred Reish and Joan M. Neri
Beneficiaries of qualified tuition programs under Section 529 of the Internal Revenue Code (529 accounts) will have a new opportunity starting January 1, 2024. Under SECURE Act 2.0 (the Act), 529 account beneficiaries will be able to rollover funds from the 529 account into a Roth IRA without incurring tax or penalties providing certain requirements are met.

The Best Interest Standard for Recommending Account Types

By Fred Reish and Joan M. Neri
Under Regulation Best Interest, the Securities and Exchange Commission (SEC) imposes a best interest standard on account recommendations by broker-dealers. This is because recommending an account type is viewed by the SEC as recommending an investment strategy involving securities. The SEC imposes a similar best interest standard on registered investment advisers under the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers.

Investors Versus Machines: The SEC Cracks Down on AI, Robo-Advisors and Potential Conflicts of Interest

By Sandra D. Grannum, Jamie L. Helman and Justin M. Ginter
Artificial intelligence (AI) tools are divisively integrating into all aspects of society — from the classroom to the courtroom. Many broker-dealers have also implemented AI-assisted analytics and technology. No one is questioning the “pros” of AI. But many are still concerned about the risks. The SEC is no different, nor are they any less divided. Here, the SEC has honed in on conflicts of interest that may arise through the use of AI.

The SEC’s Intensified Scrutiny of Off-Channel Communications at Registered Firms

The U.S. Securities and Exchange Commission has maintained its focus to monitor and regulate off-channel communications of its registrants as highlighted in recent settlement actions in which the agency charged 11 Wall Street firms with widespread recordkeeping failures.

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Investors Versus Machines: The SEC Cracks Down on AI, Robo-Advisors and Potential Conflicts of Interest

We are probably still years away from Wall Street being overrun by actual robots. Nonetheless, artificial intelligence (AI) tools are divisively integrating into all aspects of society—from the classroom to the courtroom. Many broker-dealers have also implemented AI-assisted analytics and technology. Indeed, over the last several years, many firms have made investing more easily accessible and user-friendly through “robo-advisors.” No one is questioning the “pros” of AI. But many are still concerned about the risks. The SEC is no different, nor are they any less divided. Here, the SEC has honed in on conflicts of interest that may arise through the use of AI.

On July 26, the Securities and Exchange Commission (SEC) proposed a regulation under the Securities Exchange Act of 1934 and Investment Advisors Act of 1940 to combat what it sees as conflicts of interest arising from using predictive data analytics by broker-dealers and investment advisors. In strong language, the proposed rule seeks to “to eliminate, or neutralize the effect of, certain conflicts of interest associated with broker-dealers’ or investment advisers’ interactions with investors through these firms’ use of technologies that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes.” The proposed regulation would require broker-dealers and investment advisors to take steps to address potential conflicts of interest from predictive analysis and similar technologies that interact with investors to prevent firms from placing their own interests ahead of the investors’ interests.

Continue reading “Investors Versus Machines: The SEC Cracks Down on AI, Robo-Advisors and Potential Conflicts of Interest”

The Best Interest Standard for Recommending Account Types

Under Regulation Best Interest (Reg BI), the SEC imposes a best interest standard on account recommendations by broker-dealers.  This is because recommending an account type is viewed by the SEC as recommending an investment strategy involving securities.  The SEC imposes a similar best interest standard on registered investment advisers under the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers (the RIA Interpretation).

The DOL also imposes a best interest standard under its prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees) (the PTE), which allows broker-dealers and their registered representatives to receive conflicted compensation resulting from non-discretionary fiduciary investment advice about a change of account types for a retirement plan or an IRA.

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In Case You Missed It: Broker Dealer Law Blog – Spring 2023

The Broker-Dealer Regulation & Litigation Digest is a periodic compilation of the most read blog posts published on the Broker-Dealer Law Blog during the last few months. Catch up on the latest insights on litigation, regulatory, compliance and fiduciary issues impacting broker-dealers and other financial services companies.

Tax Credits for Starting Up Small Employer Plans: What You Need to Know

By Fred Reish and Joan M. Neri
Starting with tax years beginning after December 31, 2022, a small employer can take advantage of significant tax credits under SECURE Act 2.0 (the Act) for establishing a new retirement plan. Under the Act, the tax credits are available for plan administrative and contribution costs. The full tax credit is available to employers with 50 or fewer employees and there is a partial credit available to employers with 51 to 100 employees. There are several additional conditions for eligibility as well.

“Or Worse, Expelled”

By Sandra D. Grannum, Jamie L. Helman and Justin M. Ginter
FINRA announced on Friday, May 12, that it was expelling SW Financial, in part, because it had violated Regulation Best Interest (Reg BI). This is the first time FINRA has expelled a firm since Reg BI took effect in June 2020. The move by FINRA, however, tracks with its increased rhetoric that it will be cracking down on brokerage firms for Reg BI violations. As we have previously reported, the Division of Examinations of the Securities and Exchange Commission (the Division) has been busy implementing broker-dealer examinations to assess compliance with the regulation.

Recent State Fiduciary and Best Interest Developments

By Joan M. Neri
The number of states adopting rules that follow the Suitability in Annuity Transactions Model Regulation issued by the National Association of Insurance Commissioners (NAIC) continues to grow. Colorado, Massachusetts, Alaska and Tennessee are recent additions to the following State Fiduciary and Best Interest Development chart, bringing the total to 31 as of this date.

You Made the List: SEC’s Spring Agenda Would Impact Broker-Dealers

The SEC’s Office of Information and Regulatory Affairs recently released the Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions (the Agenda). The word salad of a title hints at the fact the SEC is considering a plethora of new rules. Indeed, many of the new rules, if finalized, would impact broker-dealers (BD) and investment advisers (IA).  Below are some of the notable proposed rules of which to take stock:

Registration Requirements: The SEC is “recommending that the Commission propose amendments to the exemption for internet advisers from the prohibition against registration under the Investment Advisers Act of 1940.” These are colloquially referred to as robo-advisors.

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Recent State Fiduciary and Best Interest Developments

The number of states adopting rules that follow the Suitability in Annuity Transactions Model Regulation issued by the National Association of Insurance Commissioners (NAIC) continues to grow. Colorado, Massachusetts, Alaska and Tennessee are recent additions to the following State Fiduciary and Best Interest Development chart, bringing the total to 31 as of this date.

Continue reading “Recent State Fiduciary and Best Interest Developments”

“Or Worse, Expelled.”

Hermione Granger (yes, from Harry Potter) is famously attributed with the following quote: “I’m going to bed before either of you come up with another clever idea to get us killed. Or worse, expelled.” Unfortunately, cleverness failed to save Salomon Whitney Financial, LLC (SW Financial) recently when FINRA announced that it had followed through with its threats of increased enforcement efforts and expelled the firm and suspended its co-owner and CEO, Thomas Diamante.

FINRA announced on Friday, May 12, that it was expelling SW Financial, in part, because it had violated Regulation Best Interest (Reg BI). This is the first time FINRA has expelled a firm since Reg BI took effect in June 2020. The move by FINRA, however, tracks with its increased rhetoric that it will be cracking down on brokerage firms for Reg BI violations. As we have previously reported, the Division of Examinations of the Securities and Exchange Commission (the Division) has been busy implementing broker-dealer examinations to assess compliance with the regulation.

Continue reading ““Or Worse, Expelled.””