SEC Issues Bulletin on Fiduciary Principles

The US Securities and Exchange Commission (SEC) issued, on March 30, 2022, a staff bulletin “reiterating the standards of conduct for broker-dealers and investment advisers when they are making account recommendations to retail investors.” The bulletin “provides staff views on how broker-dealers, investment advisers, and their associated persons can satisfy their obligations to retail investors when making account recommendations.” It notes: “Selection of an account type is a consequential decision for retail investors.”

In an accompanying statement, SEC Chairman Gary Gensler said: “[T]he Bulletin highlights broker-dealers’ obligations under Regulation Best Interest and investment advisers’ obligations under the Investment Advisers Act fiduciary standard to act in retail investors’ best interest and not to place their own interests ahead of the investor’s interests … It is important that investors can trust that the advice or recommendations they receive are designed to serve their best interests.”

Key Takeaways:

  • The SEC issued a staff bulletin on March 30, 2022, regarding fiduciary principles.
  • It focuses on the obligations and considerations faced by brokers and advisers in recommending accounts to retail investors.
  • It asserts that the best interest standard for brokers and the fiduciary standard for advisers “yield substantially similar results.”

Best Interest vs. Fiduciary Standard:

The SEC staff bulletin states: “Both Regulation Best Interest (‘Reg BI’) for broker-dealers and the fiduciary standard for investment advisers under the Investment Advisers Act (the ‘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.”

Account Recommendations: Overview:

The SEC staff bulletin runs for over 4,500 words, including footnotes. Highlights follow.

“[U]nless you obtain and evaluate sufficient information about a retail investor, you will not have the ability to form a reasonable basis to believe your account recommendations are in the retail investor’s best interest.”

“Under both Reg BI and the IA fiduciary standard you may recommend an account to a retail investor only when you have a reasonable basis to believe that the account is in the retail investor’s best interest.”

“[Y]”ou cannot recommend an account that is not in a retail investor’s best interest solely based on your firm’s limited product menu or arising from limitations on your licensing.”

Retail Investor Characteristics:

The bulletin indicates that brokers and advisers should consider various characteristics about a retail investor in recommending accounts. These include:

“[Y]ou should consider, without limitation, 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.”

“[Y]ou 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.”

Cost Issues:

The bulletin states that costs should be a consideration.

“[Y]ou must always consider cost as a factor when making an account recommendation.”

“Examples of costs can include account fees (e.gasset-based, engagement, hourly), commissions and transaction costs (e.g, markups and markdowns), tax considerations, as well as indirect costs, such as those associated with payment for order flow and cash sweep programs. When applicable, cost of an account also includes fees associated with the investment products that are available through the account, such as the internal expenses of funds, including management fees, distribution and servicing fees, and the costs of investing in funds, including front- end and back-end fees.”

Other Issues:

The bulletin also covers various other issues. Some of these are:

“Some examples of factors, alongside cost, that you may consider can include the investor’s need for certain services or certain types of investment products or strategies that are only available in certain account types; the account’s characteristics, including any special or unusual features requested by the retail investor, such as tax advantages; potential benefits and risks; time horizon; and anticipated composition of investments in the investment account.”

“Although the retail investor’s preference should be considered, you would not satisfy the standards based on the retail investor’s preference alone … however, if the retail investor ultimately directs you to open an account that is contrary to your recommendation, you would not be required to refuse to accept the investor’s direction.”

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