SEC Releases Final Reg BI Staff Bulletin Addressing Duty of Care
From the desk of Jim Eccleston at Eccleston Law
The Securities and Exchange Commission (SEC) recently published a final staff bulletin on Regulation Best Interest (Reg BI), this time highlighting the “duty of care”, with the goal of definitively outlining financial advisors’ ethical responsibilities.
The guidance, which is not a new regulation, follows two previous Reg BI staff bulletins on account recommendations and managing conflicts of interest. According to the bulletin, financial advisors have a duty to fully understand the “potential risks, rewards, and costs associated with a product, investment strategy, account type or series of transactions.” Specifically, understanding an investment involves evaluating its objectives, costs, characteristics, risk, expected returns, and potential losses. Financial advisors also are required to have “a reasonable understanding of the specific retail investor’s investment profile, which generally includes the retail investor’s financial situation (including current income) and needs; investments; assets and debts; marital status; tax status; age; investment time horizon; liquidity needs; risk tolerance; and any other information the retail investor may disclose”, according to the SEC.
Finally, adhering to Reg BI’s duty of care requires financial advisors to record a list of “reasonably available alternatives” to recommended investments. While financial advisors will not be responsible for considering every conceivable option, the breadth of alternatives “will depend on the facts and circumstances, including but not limited to the nature of the firm’s business, the retail investor’s investment profile, the scope of its relationships with its customers and clients and the reasonable availability of alternative investments or investment strategies”, the SEC noted.
Eccleston Law LLC represents financial advisors and investors nationwide in securities, employment, transition, regulatory and disciplinary matters.
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