Page 12 - Investment Advisor June 2023

Beginnings

WASHInGTOn WATCH

By Melanie Waddell

seC Issues new reg BI Guidance

The agency’s third bulletin focuses on brokers’ and advisors’ care
obligations when providing advice.

he Securities and Exchange professional cannot satisfy its obligations
Commission released guidance simply by recommending the lowest cost
Tin mid-April for advisors and option.” The firm and financial pro-
brokers on meeting their care obliga- fessional, the agency explained, “must
tions when providing investment advice always consider cost as a factor when
and recommendations to retail inves- providing a recommendation or advice
tors. In its new guidance, released in a to a retail investor,” the guidance states.
Q&A format, SEC staff focuses primar- In the SEC’s view, “the firm and
ily on the Care Obligation of Regulation financial professional should consider
Best Interest for broker-dealers and the total potential costs when evaluating
the duty of care enforced under the whether the recommendation or advice
Investment Advisers Act of 1940 for is in a retail investor’s best interest,
investment advisors. including direct and indirect costs that
This is the agency’s third bulletin • Having a reasonable understanding could be borne by the retail investor.”
on Reg BI, which the agency says is of the specific retail investor’s invest- For instance, when determining
guidance and does not create new ment profile; and whether an investment or investment
regulations or rewrite existing ones. • Based on the understanding of the strategy is in the investor’s best interest,
SEC staff guidance, according to SEC first two elements, having a reasonable the guidance states, a firm and financial
officials, can also not be the basis for basis to conclude that the recommenda- professional should consider the poten-
an enforcement action. The first one tion or advice provided is in the retail tial costs, such as:
addressed account recommendations, investor’s best interest. • Commissions, markups or mark-
such as rollovers. The second one, The bulletin, for instance, defines downs, and other transaction costs; sales
issued last April, focused on identify- “investment profile,” and how it helps loads or charges;
ing and addressing conflicts. brokers and advisors satisfy their care • Advisory or management fees;
“Obtaining and then evaluating obligation. The term “investment profile” • Other fees or expenses that may
information about the retail investor’s refers to information that the firm or affect a retail investor’s return (such as
investment profile is a critical step to financial professional generally should Rule 12b-1 fees, other administrative and
satisfying your care obligation,” the SEC make reasonable efforts to ascertain about service fees, revenue sharing, and trans-
states. The care obligations, the SEC the retail investor, the agency explains. fer agent fees); and
explains, generally includes three over- The agency also explains that while • Trading and other costs associated
arching and intersecting components: costs are always a “relevant factor to con- with an investment strategy.
• Understanding the potential risks, sider when recommending or provid- The guidance also states that brokers
rewards and costs associated with a ing advice on investments or investment and advisors should not rely solely on
product, investment strategy, account strategies, they should not be the only their firm’s approved list of investments
type or series of transactions; consideration, and a firm or financial for retail investors. “Although firms have

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