On Thursday, the U.S. Securities and Exchange Commission issued stricter guidance to investment advisors and broker-dealers regarding their obligations to individual investors when recommending investment products.
of preliminary report It builds on the Best Interests Rule of 2019 Regulations created under the Republican-led SEC, which outlines the primary obligations advisors have when providing investment advice and recommendations to clients.
Thursday’s guidance comes in the form of a 20-question FAQ, explaining that advisors must have a comprehensive understanding of the investments they recommend and cannot rely on a company-approved list of investments. doing. Specifically, factors such as the client’s objectives, expected performance of the investment, risks, unusual features, costs, client profile and duration should be considered. According to the Bulletin, costs are always associated with recommendations and may include fees, fees and tax considerations.
Familiarity with the client’s profile should include information regarding debt and financial situation, other investments, liquidity needs, time horizons, and other factors. These factors are subject to change over time and should be evaluated on an ongoing basis. The SEC said that if some information is not available, the advisor may “Until you have obtained the necessary investor information, you should generally decline to provide such recommendations or advice. ”
Some advisors may be limited in the number of investments they can offer their clients. According to the SEC, advisors are clearly not permitted to provide advice that is in the best interests of their clients. “Firms and their financial professionals cannot justify relying on a limited menu to recommend or provide advice on investments that fall short of their obligation to act in the best interests of individual investors. We cannot,” the SEC wrote.
Advisors should also consider the clients they are advising in terms of the complexity of investment proposals, according to a spokeswoman.
“Companies and their financial professionals, in addition to developing a better understanding of the product, need to obtain information about retail investors to support their conclusion that complex and risky products are in their best interests. There is,” the SEC wrote.
Regulators have responded to financial professionals who are licensed as both broker/dealers and advisors. The bulletin said such persons would have to disclose which position they work in, and that different obligations could be “triggered at different times.”
This guidance is the second from the SEC in less than a year to build on the first best interest. We issued an Interpretation Bulletin in August 2022 and found that virtually all financial professionals have at least some degree of conflict of interest when working with retail investors and actively seek to avoid those conflicts of interest. pointed out that we should work