Page 13 - Investment Advisor June 2023

duties under their care obligations, includ- alternatives should begin early in the “Advisors must also do their own anal-
ing a general responsibility to understand process of formulating a recommenda- ysis of the approved investment options
the investments or investment strategies tion or providing advice rather than as on a client-by-client basis,” she added.
that they are recommending or on which a retroactive exercise after the financial ”This is a good reminder to firms and
they provide advice, financial profession- professional has already decided what advisors as the use of approved lists of
als also have this responsibility,” it explains. to recommend or advise,” he explained. investments has increased since Reg BI.”
While firms should generally help Likewise, Hanna added, “the staff’s 2. Firms must train advisors on
ensure financial professionals “have suf- view that it is ‘particularly important’ to their products (and document it well).
ficient information and training to under- document the basis for a reasonably avail- The staff bulletin “referred to the use of
stand the investments and investment able alternatives analysis when the recom- employee training in multiple sections
strategies they recommend or advise on,” mendation poses a conflict for the firm or regarding how an advisor can be sure to
the agency explains, “financial profession- the financial professional is also something understand the products and investment
als cannot satisfy their own care obliga- new, and potentially with broad implica- strategies they recommend,” Lynch said.
tions by solely relying on the “Firms should make sure
efforts of others at their firm.” “The firm and financial professional their training programs are
Financial professionals, should consider the total potential well documented, attendance
the agency warns, “remain is tracked, and advisors that
responsible for personally costs when evaluating whether the miss training attend make-
understanding an invest- recommendation or advice is in a up sessions or participate in
ment or investment strategy documented online training.”
before they recommend or retail investor’s best interest, including 3. Making the best choice
provide advice with regard direct and indirect costs that could be from a narrow list is not
to that investment or invest- enough. The question on
ment strategy.” borne by the retail investor.” —SEC “most appropriate” “makes
it very clear that making the
reAsonABle AlternAtIves tions because of how broadly it is worded.” best recommendation from a limited
Issa Hanna, partner at Eversheds For instance, “there is no qualifier on menu of available options will not meet
Sutherland’s New York office, said in an the use of the word ‘conflict’ (i.e., it does the care obligation,” Lynch warned. “In
email that, with this new guidance, “it’s not seem to be limited to a conflict that this case, no recommendation may be
the first time we’ve seen any substan- would be material to the consideration made if the ‘most appropriate’ is not in the
tial guidance on the topic of consider- of the different alternatives),” he said. client’s best interest. Firms may be forced
ation of reasonably available alternatives The guidance also states that brokers to broaden their offerings now based
since the SEC adopted Reg BI.” and advisors should not rely solely on upon this very clear response from staff.”
In Reg BI’s adopting release, the their firm’s approved list of investments More firms, Lynch added, “may go the
agency said that a broker-dealer gener- for retail investors. open-architecture route.”
ally should consider reasonably avail- 4. For dual registrants, account type
able alternatives as part of determining 4 tIPs For AdvIsors matters. The last two questions for dual
whether it has a reasonable basis to Amy Lynch, president and founder of registrants “are helpful as advisors some-
believe that a recommendation is in the FrontLine Compliance, told Investment times get confused as to which hat they are
best interest of its retail customer. Advisor that advisors should take note wearing and when,” Lynch pointed out.
“We have seen the staff communicate of the following four items in the Reg The SEC staff “made it clear that the type
some of these concepts in the course of BI bulletin: of account for which the recommendation
examinations (particularly, the expectation 1. Advisors can’t rely on a firm- is made becomes a determining factor.”
that firms provide financial professionals approved list of investments. Question Also, she said, “the type of account
with specific direction on the alternatives 4 of the bulletin describes how advisors to be opened in the case of a new cli-
to consider as part of a reasonably avail- “cannot rely upon due diligence per- ent or relationship — BD or RIA — is
able alternatives analysis), but some of the formed on investments by the firm itself,” another factor dual registrant advisors
concepts are new to us,” Hanna said. Lynch explained. “This means that the should consider when making recom-
For instance, “it is worth calling out use of a list of ‘firm-approved invest- mendations to clients. The duty of care
specifically the staff’s view here that the ments’ cannot be relied upon to satisfy extends to the account type, not just the
consideration of reasonably available the care obligation alone,” Lynch said. recommendation itself.”

June 2023 Investment AdvIsor 11