SEC Issues Guidelines For Standards of Conduct And Care Obligations For Investment Advisors
The Securities and Exchange Commission recently released a staff bulletin to offer further guidance to brokers, broker-dealers, and investment advisors. Written in a question-and-answer format, the bulletin is designed to offer information to its target audience for two topics:
- The Care Obligation of Regulation Best Interest (“Reg BI”) for broker-dealers
- The duty of care enforced under the Investment Advisers Act of 1940, known as the “IA fiduciary standard” for investment advisors
These are collectively referred to as “care obligations,” requiring a fiduciary to put the client’s needs above their own when making recommendations. Many brokers are also registered as investment advisors. When acting as an investment advisor, the broker must notify the customer that they are acting in that capacity and use the IA fiduciary standard.
Understanding The Product—Investment Or Investment Strategy
Prior to making any recommendations to a client, a broker and/or investment advisor must understand the product they are suggesting. They must understand the possible risks, rewards, and the costs of making that investment or investment strategy, as well as:
- The investment objectives, i.e., short- or long-term holding, exposure to a particular market sector, income, etc.
- The costs of this investment/investment strategy, i.e., direct/indirect costs, continual expenses, or a redemption fee
- Key characteristics and risks such as volatility or liquidity
- Characteristics that may impact the investment, such as terms of margin call or early repayment
- Possible performance in a variety of market conditions
- Any expected returns, payout rates, or potential losses
- Specific features, such as guaranteed payments or tax advantages
- How this investment fits into a specific investor’s portfolio, current or future
Having this understanding makes it easier to understand whether the investment is in the client’s best interest. If there is an ongoing monitoring compliance requirement, the broker or investment advisor must continue to review the investment or investment strategy after purchase and during the term of the client’s relationship. A broker or investment advisor should not rely solely on the firm’s recommendation for an investment since they are solely responsible for their recommendations to their clientele.
While costs are always a consideration, the broker or investment advisor shouldn’t stick with suggesting only the lowest-cost recommendations. The customer should understand all the relevant factors involved in each recommendation, the cost over the lifetime of the recommendation, and which one is the better option with cost as one factor.
Understanding The Customer
An investor’s profile is information that a firm collects about their clients to determine the best options to recommend to them. The information gathered is critical to a firm and their representatives to meet the care criteria.
Having this information available gives a profile of each individual investor and what they hope to achieve by investing. Whether they’re interested in conservative, slow-growth investments or higher-risk investment, this information shows a firm’s representatives which investments to recommend and which to avoid. The representative must have a reasonable basis to believe that a particular investment or strategy is based on information that reflects the investor’s current state and desires for their portfolio.
To achieve this goal, the broker or investment advisor must collect information from their clients, including:
- Their current financial situation, including income
- Marital status
- Assets and debts
- Current investments
- Tax status
- Experience with investments
- Investment objectives
- Risk tolerance
It’s important for brokers and investment advisors to keep current with the client so that their profile is always up to date, and that their profile doesn’t contain conflicting objectives. Investors should also ensure that their profiles are updated with life events such as marriage, divorce/widowhood, birth of a child or grandchild.
Brokers should occasionally ask for updates so that they can make recommendations that are suitable for an investor’s current state as well as their best interest.
Understanding The Alternatives
Another point is for brokers and investment advisors to understand what it calls “reasonably available alternatives.” That is, investments that are suitable for the investor’s portfolio and in their best interest and may be like their primary recommendations.
A broker can consider alternatives in their recommendations that may be more suitable for the investor, or should the investor ask for something different. In fact, reasonably available alternatives should be considered early in the process, and not as an afterthought. Firms should also have their own process for evaluating those alternatives created just for their business model.
These alternatives are simply additional offerings available to brokers and investment advisors that resemble their first choices for a client. Still, representatives must consider the same risks, costs, and benefits of each offering, and if it is in the client’s best interest.
However, these reasonable alternatives are not the same as what some brokers and investment advisors call “alternative investments,” such as non-traded REITS, cannabis-based “pot stocks” and cryptocurrencies.
Note that this staff bulletin is simply an informational document created and published by SEC staff drafted from their own views and perspective. This document is not a rule, requirement, regulation, law, or a statement by the Commission.
Did You Invest With A Broker Who Didn’t Follow RegBI?
Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.