SEC Regulation Best Interest

The SEC’s Regulation Best Interest, which prohibits broker-dealers and certain other advisors from providing conflicted advice, among other things, also applies to transactions involving rollovers between retirement accounts. The rule clearly states that the best interest standard will now apply to rollovers from employer-sponsored plans into IRAs.<br /> <br /> Because of this, advisors who make recommendations regarding rollover of retirement assets will now be required to establish that the rollover was in the client’s best interest. Establishing that the rollover transaction was in the client’s best interests can be accomplished in a number of ways, including by showing that the advisory services provided by the advisor with respect to the IRA add value as a tool for meeting the client’s goals. This may be the case even if the fees associated with the IRA are higher than those in the employer plan. In other situations, investment options and investment mix in the rollover IRA may better suit the client’s goals. Generally, broker-dealers who make rollover recommendations must consider:<br /> <ul><br /> <li>fees and expenses,</li><br /> <li>available services in both plans,</li><br /> <li>available investment options,</li><br /> <li>availability of penalty-free withdrawals from the accounts,</li><br /> <li>how required minimum distribution (RMD) rules can impact the client’s goals,</li><br /> <li>whether the plan provides any level of creditor protection,</li><br /> <li>whether the plan permits holding of employer stock, and</li><br /> <li>any additional special features of the initial account.</li><br /> </ul><br /> Ultimately, the SEC may provide additional guidance on the best interest standard with respect to rollovers. In the alternative, its eventual enforcement of the rule may provide clarity for advisors.

The SEC version of a fiduciary standard (known as regulation best interest) creates a new Form CRS, which will function as a client relationship summary to avoid confusion among clients as to the relationship between the parties and the duties of the advisor.<br /> <br /> The final version of Form CRS was modified to contain less information which, according to the SEC, was deemed appropriate in order to avoid “information overload” for retail clients. The form will be required for investment advisors and broker dealers, and will contain the following information, in addition to a standardized introductory paragraph:<br /> <ol><br /> <li>description of relationship and services offered by the firm and advisors,</li><br /> <li>information about fees and costs, as well as information regarding any conflicts of interest and the standard of conduct associated with services provided by the advisor,</li><br /> <li>whether the firm and advisors have a reportable legal or disciplinary history,</li><br /> <li>where the client can find additional information about the firm, and contact information for clients to register complaints, and</li><br /> </ol><br /> The relationship summary will also be required to link to Investor.gov/CRS on the SEC website, where the client can obtain educational information. Form CRS will follow a question-and-answer format, and is limited in length to two pages for investment advisors and broker-dealers, and four pages for dual registrants.<br /> <br /> The Form CRS must be filed with the SEC, and clients would be allowed to access any firm’s Form CRS, which are available to the public at investor.gov.