Category: SEC Rules

FINRA’s Focus on Account Recommendations and Rollovers

FINRA’s continued focus on account recommendations and rollovers is evident in its 2025 FINRA Annual Regulatory Oversight Report (the Report),  Based on the Report, broker-dealers and their registered representatives (advisors) should ensure that account transfers and rollover recommendations are evaluated based on all relevant factors, that the recommendation aligns with the investor’s financial circumstances and investment objectives, and that the investor receives adequate disclosures.

In its Report, FINRA identifies a number of issues it has uncovered during its regulatory examinations that directly address account recommendations and rollover recommendations and sets forth effective practices to address these issues.  These issues and FINRA’s recommended effective practices are discussed below.

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Crypto is Here to Stay in 2024, So Be Careful How You Talk About It

More than ever before, financial services regulators must increasingly adapt to technological advances. Perhaps no other technological advancement is more important right now than crypto currency. Crypto currency is defined as digital assets issued or transferred using blockchain technology. Earlier this month, the SEC, despite SEC chairman Gary Gensler’s well-known skepticism of crypto, granted Bitcoin, the world’s largest crypto currency, approval to be the first crypto asset listed as an exchange traded fund (ETF). This defining moment for crypto currency further cements the relatively new technology into the financial services and securities landscape.

Anticipating the changing tides, FINRA recently declared in its 2024 Annual Regulatory Oversight Report that it would add a brand-new Crypto Asset Development section – dedicated to providing guidance for member firms engaging in (or expecting to engage in) the crypto economy. This new section includes reports from FINRA’s November 2022 targeted exam reviewing the practices of certain member firms that communicate with retail customers concerning crypto assets and crypto asset-related services. The relevant time period of the exam was from July 1 through September 30, 2022. On January 24, 2024, FINRA published an update to the targeted exam, claiming that approximately 70 percent of the more than 500 retail customer communications it reviewed contained potential FINRA Rule 2210 violations (communication with the public), including the following:

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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.

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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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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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In Case You Missed It: Broker-Dealer Regulation & Litigation Digest – Winter 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. Here you can catch up on what you missed or re-read these popular posts.

The DOL’s New Fiduciary Rule: What We Can Expect

By Fred Reish and Joan M. Neri
The current Department of Labor fiduciary rule says that a broker-dealer and its registered representatives (advisors) are fiduciaries to a plan under ERISA if a functional five-part test is satisfied. This same five-part test applies to determining whether an advisor is a fiduciary to an IRA under the Internal Revenue Code.

You Might Want to Write Down Why You Recommended That Rollover

By Sandra D. Grannum, Jamie L. Helman and Emmanuel Brown
The Division of Examinations of the Securities and Exchange Commissions (the Division) has been busy implementing examinations of broker-dealers to assess compliance with the regulation. The Division is planning to include Reg BI compliance into future examinations of broker-dealers. Therefore, the Division issued a Risk Alert on January 30, 2023, calling attention to deficiencies found during broker-dealer compliance examinations, as well as certain inadequate practices that might lead to deficiencies. Broker-dealers should pay attention to the issues identified by the SEC so that they do not expose themselves to regulatory trouble later down the line.

Managing IRAs: Charging Different Fees for Different Investments

By Fred Reish and Joan M. Neri
Registered investment advisers, including dual registrant broker-dealers, who provide discretionary investment management services to individual retirement accounts (IRAs), are fiduciaries under the Internal Revenue Code (the Code). While the Code does not have a fiduciary standard of care, it does have a duty of loyalty in the sense that most conflicts of interest are prohibited.

SIFMA C&L March 2023 Annual Conference – A Focus on Crypto

The 2023 Securities Industry and Financial Markets Association’s (SIFMA) Compliance & Legal Annual Seminar, as usual, was well attended by compliance and legal professionals, including FINRA executives and SEC directors. The three-day event held, where outside San Diego skies were overcast and grey, also coincided with the run on SVB, and gloomy forecasts for Signature Bank and First Republic. Inside, industry leaders, and regulators discussed legal trends on the horizon. Not surprisingly there was a focus on crypto at this year’s conference. While Reg BI, ESG, off-channel communications, cybersecurity and the foreboding banking issues (among others) were also hot topics being discussed by industry insiders, here we focus on crypto. Below are some key takeaways.

Expect More SEC Enforcement Actions with a Focus on Crypto

SEC Director Gurbir Grewal noted the Commission’s general intent to focus on enforcement actions and swiftly bringing those actions to resolution as a way to rebuild public trust in the markets, financial institutions and the Agencies. He also urged firms to self-report and stressed the need for robust compliance programs, especially as new rules and regulations continue to be issued. He took time to speak about crypto investments and noted that traditional firms generally “do not and cannot” participate in this space due to the lack of compliance and clear rules around these investments. He also noted that the SEC is doubling the size of its Crypto Assets and Cyber Unit in order to focus on crypto’s harm to investors; indeed the SEC has already brought more than 100 enforcement actions related to crypto. A fact which is reflected on the “SEC Crypto Assets and Cyber Enforcement Actions” website.

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You Might Want to Write Down Why You Recommended that Rollover

Since Regulation Best Interest’s (Reg BI) June 30, 2020 compliance date, the Division of Examinations of the Securities and Exchange Commissions (the Division) has been busy implementing examinations of broker-dealers to assess compliance with the regulation. The Division is planning to include Reg BI compliance into future examinations of broker-dealers. Therefore, the Division issued a Risk Alert on January 30, 2023 calling attention to deficiencies found during broker-dealer compliance examinations, as well as certain inadequate practices that might lead to deficiencies. Broker-dealers should pay attention to the issues identified by the SEC so that they do not expose themselves to regulatory trouble later down the line.

Some of the exposed weaknesses and deficiencies regarding the Reg BI Care Obligation1 involved inadequate written policies that directed financial professionals to document the basis for their recommendations but failed to state when doing so is required or which information is needed. Under Reg BI, financial professionals are required to make account recommendations that are in the best interest of the retail investor. Doing so is especially important when a financial professional is recommending a significant financial transaction to a retail investor, like an account rollover recommendation.

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