Brokers need to carefully consider alternatives before recommending cryptocurrencies, asset-backed securities and other risky and complex products.
And if they’re at a firm that also happens to be a registered investment advisor, they need to make sure they are charging their clients in a way that serves their interests.
Those are two big takeaways from a staff bulletin the Securities and Exchange Commission began circulating on Thursday. The SEC, which oversees large parts of the wealth management industry, issued the bulletin as the last of three guidance documents it planned to circulate following the adoption of Regulation Best Interest for the broker-dealer industry in June 2019.
This time, the SEC is calling to attention to what it calls the duty of care, a responsibility to look out for clients’ best interests using a reasonable understanding of their objectives. The previous two bulletins dealt with account recommendations, including 401(k) rollovers, and avoiding conflicts of interest.
The SEC’s general goal is to shed light on brokers’ obligations under Regulation Best Interest, which is often characterized as weaker than the fiduciary duties governing financial advisors’ conduct. But both standards call on financial planners to look out for their clients’ best interests, to eliminate conflicts of interest as much as possible and to disclose any unavoidable conflicts.
SEC officials said Thursday there is one big difference. Regulation Best Interest, or Reg BI for short, applies only at the time that a broker is recommending an investment or helping to complete a transaction for an investor. The fiduciary standard applies throughout an advisor’s entire relationship with clients.
The SEC has so far brought one enforcement case under Reg BI and the Financial Industry Regulatory Authority, the brokerage industry’s self-regulator, has initiated only a few more. Regulators have said they are planning to get stricter about Reg BI violations this year.
SEC officials said Thursday the latest staff bulletin is a further indication of what advisors and brokerages need to do if they want to stay on the right side of the law. Here are some of their tips: