SEC Issues New Reg BI Guidance

SEC headquarters building in Washington

The Securities and Exchange Commission released guidance Thursday for advisors and brokers on meeting their care obligations when providing investment advice and recommendations to retail investors.

In its new guidance, released in Q&A form, the SEC focuses primarily on the Care Obligation of Regulation Best Interest for broker-dealers and the duty of care enforced under the Investment Advisers Act of 1940 for investment advisors.

This is the agency’s third bulletin on Reg BI, which the agency says is guidance and does not create new regulations or rewrite existing ones. SEC staff guidance, according to SEC officials, can also not be the basis for an enforcement action.

The first one addressed account recommendations, such as rollovers. The second one, issued last April, focused on identifying and addressing conflicts.

The care obligations, the SEC explains, generally includes three overarching and intersecting components:

Understanding the potential risks, rewards and costs associated with a product, investment strategy, account type or series of transactions;
Having a reasonable understanding of the specific retail investor’s investment profile; and
Based on the understanding of the first two elements, having a reasonable basis to conclude that the recommendation or advice provided is in the retail investor’s best interest.

The bulletin, for instance, defines “investment profile,” and how it helps brokers and advisors satisfy their care obligation.

The term “investment profile” refers to information that the firm or financial professional generally should make reasonable efforts to ascertain about the retail investor, the agency explains.

“Obtaining and then evaluating information about the retail investor’s investment profile is a critical step to satisfying your care obligation,” the SEC states.

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The agency also explains that while costs are always a “relevant factor to consider when recommending or providing advice on investments or investment strategies, they should not be the only consideration, and a firm or financial professional cannot satisfy its obligations simply by recommending the lowest cost option.”