Regulation Best Interest: Education vs. Recommendation (Rollovers Part 3)

The SEC has issued its final Regulation Best Interest (Reg BI), Form CRS Regulation, RIA Interpretation and Solely Incidental Interpretation. I am discussing the SEC’s guidance in a series of articles entitled “Best Interest Standard of Care for Advisors.”

In my last post, Best Interest for Advisors #16, I pointed out that, if a broker-dealer’s advisor recommended that a participant rollover his or her benefits in a workplace retirement plan to an IRA, it would be subject to the best interest standard of care (when Reg BI applies on June 30, 2020). (Best Interest for Advisors #15 discussed the process and factors to be considered to make a best interest rollover recommendation.)

My last post then went on to discuss rollover education and information . . . as opposed to a rollover recommendation. If properly done, the education and information approach can be used by broker-dealers if they are concerned about the difficulty of gathering the information for a rollover recommendation and the process for evaluating that information.

This article covers the SEC’s general guidance about financial education. In the adopting release for Reg BI, the SEC explained:

“The treatment of certain communications as ‘education’ rather than ‘recommendations’ is well understood by broker-dealers. We generally view the following types of communications as not being recommendations of any securities transaction or investment strategy involving securities as long as they do not include, standing alone or in combination with other communications, a recommendation of a particular security or securities or particular investment strategy involving securities:

Thus, for example, a general conversation about retirement planning, such as providing a company’s retirement plan options to a retail customer, would not, by itself, rise to the level of a recommendation. Similarly, where a broker-dealer informs a retail customer that he or she needs to take a required minimum distribution under the Internal Revenue Code, we would not interpret such communication, by itself, to rise to the level of a recommendation. Such a communication would be considered investment education or descriptive information, provided it does not involve, for example, a recommendation regarding specific securities to be sold or a recommendation regarding specific securities to be purchased with the proceeds of any sale. We agree with commenters that Regulation Best Interest should not stifle investment education as a means to encourage financial wellness, or otherwise restrict broker-dealers from disseminating information about, for example, retirement plans, and the approach we are taking to what is or is not considered a ‘recommendation’ achieves this goal.”

• General financial and investment information, including:

  • Basic investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment,

  • historic differences in the return of asset classes (e.g., equities, bonds, or cash) based on standard market indices,

  • effects of inflation,

  • estimates of future retirement income needs, and

  • assessment of a customer’s investment profile;

• Descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan;

• Asset allocation models that are:

  • Based on generally accepted investment theory,

  • accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor’s assessment of the asset allocation model or any report generated by such model, and

  • in compliance with FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools) if the asset allocation model is an ‘‘investment analysis tool’’ covered by FINRA Rule 2214; and

• Interactive investment materials that incorporate the above.

While the SEC’s discussion of investment education does not specifically reference rollovers, the concept should be the same. That is, information about the four alternatives for participants (taxable distributions, leave the money in the plan, transfer the money to the plan of a new employer, or roll over to an IRA), together with a discussion of the major and typical advantages and disadvantages of each, would not be a recommendation (so long as the discussion is accurate and unbiased). That is also consistent with FINRA Regulatory Notice 13-45 and the DOL’s vacated Fiduciary Regulation. For example, RN 13-45 explains:

“Some firms and their associated persons provide educational information to plan participants concerning their retirement choices. Firms that permit educational information only should adopt measures reasonably designed to ensure that the firm and its associated persons do not make recommendations for purposes of Rule 2111 to plan participants. These measures should include training concerning what statements may trigger application of Rule 2111, and consideration of the compensation arrangements that could cause an associated person to make a recommendation. To the extent that a firm prohibits recommendations to plan participants, supervisory personnel of the firm should reasonably monitor the communications to ensure that the prohibition is not compromised.”

While not required, from a risk management perspective, broker-dealers (and investment advisors) who adopt an educational approach should consider developing brochures and other printed materials to supplement their advisors educational conversations.