At first blush, the title of the guidance doesn’t suggest its relevance to rollovers. However, its importance becomes obvious when the meanings of “account recommendations” and “retail investors” are considered. A “retail investor” includes both a plan participant and an IRA owner. An “account” includes both 401(k) accounts and IRAs, or Individual Retirement Accounts. Thus, any recommendation to a plan participant or IRA owner to transfer from one “account” type to another is a recommendation that is covered by the SEC Staff’s Bulletin. 

Before getting into the details of the Staff Bulletin, it’s important to point out that the SEC Staff views the application of the best interest standards for broker-dealers and investment advisers to be virtually identical. In other words, both broker-dealers and investment advisers are expected to engage in the same process and to reach the same results if the circumstances are the same. Here’s what the Staff said in the Bulletin:

Both Regulation Best Interest (“Reg BI”) for broker-dealers and the fiduciary standard for investment advisers under the Investment Advisers Act (the “IA fiduciary standard”) are drawn from key fiduciary principles that include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest. Although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the staff’s view, they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors.

In the staff’s view, because each standard is drawn from key fiduciary principles, you should generally collect similar information, perform a similar analysis, and arrive at a similar conclusion about which account type(s) would be in the retail investor’s best interest, regardless of the capacity that you end up serving in.

The SEC’s authority extends to recommendations to participants in government retirement plans and other non-ERISA governed plans

One more comment before looking at the Bulletin’s questions and answers about rollover recommendations. The SEC governs a wider array of retirement plans that the DOL does. The DOL only regulates tax-qualified private sector plans (“ERISA governed plans”) and IRAs (through its authority to issue exemptions from the Internal Revenue Code’s prohibited transaction provisions), and the DOL can only investigate compliance with the rules for ERISA governed plans. On the other hand, while the SEC’s authority also covers recommendations to participants in ERISA governed plans and to IRA owners, it has broader authority beyond that. The SEC’s authority, for example, extends to recommendations to participants in government retirement plans and other non-ERISA plans (e.g., most church plans). As a result, while compliance with the DOL’s PTE 2020-02 will generally satisfy the SEC’s requirements for rollover recommendations from ERISA governed plans, the SEC is the regulator for rollover recommendations from non-ERISA retirement plans.

With that said, let’s look at the first SEC question and answer on retirement account rollover recommendations:

4. Retirement Account Rollover Recommendations¹

a. Are there additional factors that I should consider when making a rollover recommendation in order to have a reasonable basis to believe the recommendation is in the retail investor’s best interest?

Yes. When making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest.

Comment: In effect, the Staff is saying that there are two distinct recommendations in a rollover recommendation. For example, with a 401(k) plan, the first recommendation is to take the money out of the plan (which is tantamount to a recommendation to sell the investments in the participant’s account). The second account type recommendation is to put the money in an IRA. Of course, that would be followed by an investment recommendation, but account type and investment recommendations are separate actions.

The next part of the Staff’s guidance is about the information that must be collected in order to make a best interest recommendation. These factors are very similar to what the DOL requires under PTE 2020-02. The reference to “factors discussed above” is to the factors that would apply to the evaluation of any account recommendation. The following considerations are specific to rollover recommendations.

In addition to the factors discussed above, the staff believes that there are specific factors potentially relevant to rollovers that you should generally consider when making a rollover recommendation to a retail investor. These factors include, without limitation, costs; level of services available; features of the existing account, including costs; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock.

Comment: As with the DOL’s requirements, to satisfy the SEC Staff’s guidance, a financial professional needs to obtain information about the retirement plan’s investments, services, and expenses. Interestingly, the Bulletin doesn’t reference the use of alternative data if actual information about the retirement plan is available. While one could assume that the SEC would follow the DOL’s lead on that, it’s not clear from the language of the Staff Bulletin.

The Bulletin then turns to the importance of the retail investor’s (e.g., the participant’s or IRA owner’s) investment profile and the relevance of documentation of the process.

As with account recommendations more generally, relevant factors should be considered in light of, among other things, the retail investor’s investment profile to develop a reasonable belief that the retirement account or rollover recommendation is in the retail investor’s best interest. In the staff’s view, when making a rollover recommendation, it may be difficult for a firm to assess periodically the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to retail investors without documenting the basis for the recommendation.

Comment: Three thoughts: (1) As this suggests, a likely question in an SEC examination of a rollover recommendation will be, “Show me where in the investment profile it suggests that the rollover recommendation was in the best interest of the participant”. In other words, an account type recommendation, including a rollover recommendation, will be measured against the needs of a retail investor/participant, as indicated by the investor profile, for the services and investments associated with the recommended account (e.g., IRA) as compared to what was available in the investor’s prior account (e.g., the 401(k) account). 

Where the rollover is from an ERISA governed plan, it’s required that the participant be provided with the specific reasons why the rollover is in the participant’s best interest

(2) Earlier in the Bulletin, the Staff pointed out that costs will be part of the evaluation every account type recommendation. As a result, if the cost of the recommended account type is more that the cost of the existing account type, a question in an SEC examination is likely to be, “How did you justify the recommendation in light of the higher costs to the retail investor in the new account (e.g., in a rollover IRA)?”  In most cases, the justification will likely be that the retail investor needs certain services to satisfy the investor’s circumstances and investment objectives. Where the rollover is from an ERISA governed plan, PTE 2020-02 requires that the participant be provided, in writing, with the “specific reasons” why the rollover is in the participant’s best interest. Those specific reasons should describe how the participant’s needs and objectives are intended to be accomplished through the IRA and the services and investments associated with the IRA.

(3) With regard to documentation, the DOL’s PTE 2020-02 requires written specific reasons and the retention of records demonstrating compliance with the PTE’s conditions (for example, the materials reviewed as a part of the best interest process). The SEC Staff’s response is less demanding in that it recommends (perhaps strongly) that records be made and retained, but it doesn’t require that records be maintained. 

The Bulletin’s guidance then addresses consideration of leaving the money in the retirement plan:

b. When considering a rollover recommendation, do I have to consider the option of leaving the retail investor’s investments in the employer’s plan?

As discussed above, you must have a reasonable basis to believe that an account recommendation is in the retail investor’s best interest and does not place you or your firm’s interests ahead of the retail investor’s interest. In the staff’s view, it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place you or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option. To evaluate any recommendation to transfer assets out of an employer’s plan, or between individual retirement accounts, you would need to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan.

Comment: Consistent with the DOL’s position, the SEC Staff concludes that financial professionals must consider leaving the money in a participant’s plan. And the Staff explicitly states its expectation that the financial professional will obtain and review information about the participant’s plan, including information about the expenses of the investments.

Concluding Thoughts

Based on the Staff Bulletin, it seems clear that the rollover and IRA transfer rules under both the securities laws and ERISA are converging. There are some differences, though. The SEC standards apply more broadly to all recommendations to all retail investors. That means that, for example, rollover recommendations to government plans are covered by the SEC’s standards, even though they are not covered by ERISA. On the other hand, recommendations to ERISA governed retirement plans are covered by PTE 2020-02, but the SEC’s best interest standards only apply to retail investors, which do not include the plans themselves. 

Continuing on this track, rollover recommendations to participants in ERISA governed plans are subject to private rights of action for fiduciary breaches, but the SEC’s rules for retail investors do not create a right for participants to sue for breaches. PTE 2020-02 requires a written explanation of why rollover recommendations are in the best interest of a retirement investor, but the SEC guidance does not. The DOL limits compensation (e.g., fees or commissions from a rollover IRA) to a reasonable amount, while the SEC focuses more heavily on evaluating the costs to be incurred by the retail investor.

The legal bottom line is that, while there are some notable differences, the regulators appear to be converging on most of the key issues. The practical bottom line is that financial professionals need to have good processes, including obtaining plan data, for recommending rollovers. This will be an issue for future SEC examinations and DOL investigations. I suspect that, by 2024, both regulators will be looking at rollover recommendations made in 2022.