Regulation Best Interest and Individual Retirement Accounts

The retirement security proposal, proposed by the Department of Labor in October, would apply fiduciary duties under the Employee Retirement Income Security Act to rollovers to individual retirement accounts, among other transactions. Opponents of this proposal say that the Security and Exchange Commission’s Regulation Best Interest has been regulating these transactions since June 2020, and the DOL proposal is therefore unnecessary.

What does Reg BI require when it comes to rollovers?

Reg BI is a broad regulation enforced by the SEC that requires brokers and advisers to only recommend securities or strategies involving securities that are in the best interest of the customer. This does not require them to survey all securities available. They are required to tailor their advice to the needs of their client, mitigate and disclose conflicts of interest, and to be familiar with the products they recommend such that they have a reasonable basis to recommend it, among other requirements.

A staff bulletin published by the Securities and Exchange Commission in March 2022 noted that advisers must consider if a client would be better off keeping their assets in a retirement plan when recommending a rollover to an IRA: “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 your 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.”

The bulletin added that when recommending a rollover, “you would need to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan.”

Jay Gould, a special counsel with the law firm Baker Botts, says that he has not seen a lot of enforcement activity when it comes to Reg BI and rollovers, and adds that this is an “area that the regulators may want to provide additional scrutiny.”

The most recent enforcement action by the SEC under Reg BI was a $2.2 million fine imposed last week on a TIAA subsidiary for not disclosing lower-fee alternatives to clients investing in TIAA’s proprietary products. This action was not related to retirement plan rollovers.

Gould says that while the SEC regulates most rollover transactions it “could be a good idea to have a regulator come at the issue from the account side and not the investment side,” that is an approach that focuses on IRAs as such, and not the investments in them, because it could help mitigate conflicts in IRA-related transactions, especially when it comes to IRA providers that have proprietary products.

An adviser recommending a rollover under Reg BI would have to disclose fee structures within an IRA and the client’s existing retirement account and would need “to point out basic things,” such as expenses and available investments, Gould says.

Gould acknowledges, however, that examining these fee structures can be a labor-intensive process that might not be worth an adviser’s time if they fail to execute a rollover and earn a fee.