On March 30, 2022, The Securities and Exchange Commission (“SEC”) issued a bulletin reiterating broker-dealer and investment adviser standards of conduct when making account recommendations to retail investors. Financial Professionals must consider investors’ best interests and avoid incentives that may create conflicts of interest.
The standard required of a duly licensed financial professional is dependent on the capacity in which the financial professional is acting. The SEC stated that the Regulation Best Interest (“Reg BI” or “Best Interest”) and fiduciary standard “generally yield substantially similar results in terms of ultimate responsibilities owed to retail investors.” Where a financial professional is duly licensed as both a broker and registered investment advisor, the SEC recommends that the professional adhere to both standards. Regardless of which capacity the financial professional is acting when making investment recommendations, they must have a reasonable basis for making the recommendation.
According to the SEC, the financial professional must “obtain and evaluate enough information about the retail investor to have a reasonable basis to believe the account information is in the best interest of that retail investor”. Such information can include:
A recommendation can be to buy, sell or hold an investment. The rule applies a flexible approach to the “facts and circumstances” of a particular customer recommendation. A recommendation does not rely upon a transaction or the generation of compensation for its existence. A recommendation can result from financial advisor communication directed to facilitate a transaction or refrain from any transactions regarding a security or investment strategy in a customer account. The financial advisor must have a firm understanding of both the investment and the customer.
The recommendation cannot be based on materially inaccurate or incomplete information. If investor information is not available, the financial professional should refuse to provide account recommendations until they are able to gather the necessary information to form a reasonable basis.
An investor’s preference can be taken into consideration in making an account recommendation, but the preference does not satisfy the reasonable basis standard required of financial professionals. There are times that a recommendation may be the preference of an investor, but is not in the investor’s best interest after a reasonable basis analysis has been performed.
Recordkeeping rules documenting the basis for account recommendations are required of both broker-dealers and investment advisers. Written policies and procedures are required of both broker-dealers and investment advisory firms to ensure compliance with required financial professional standards of conduct.
According to the SEC, both broker-dealers and investment advisories are required “to act in the retail investor’s best interest and not place the firm’s interests ahead of the retail investor’s interest.” That being so, the SEC has compiled a list of practices that help these investment firms meet their obligations while avoiding conflict of interest:
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