IRA specialist Ed Slott.
The Securities and Exchange Commission's Regulation Best Interest requires advisors and broker-dealers to have a process to document their rollover recommendations — something most advisors don't have, warns IRA and tax specialist Ed Slott.
"Most advisors don't have a process in place to cover what the SEC Reg BI requires as to giving the clients the pros and cons of each option — roll over to an IRA, keep the funds in the plan, take a lump-sum distribution, convert to a Roth IRA or any combination of these," Slott, of Ed Slott & Co., told BenefitsPRO's sister site ThinkAdvisor in a Monday interview. "Reg BI requires a process for this."
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Said Slott: "My feeling is if more advisors were doing this, I would be getting questions."
Having such plans in place now is crucial as advisors "are processing a flood of rollovers due to layoffs" from the pandemic, Slott said.
While Reg BI has only been in effect since June 30, "my feeling is advisors are doing all these rollovers without really going through all this, and then they'll get blindsided two years later when there's some SEC audit[or] that says: 'Well, when you rolled Mrs. Smith's $400,000, show me the process you used going through all the options and the pros and cons.'"
Fred Reish, partner at Faegre Drinker Biddle & Reath in Los Angeles, agreed with Slott's assessment, stating in a Monday email: "I think it's largely true."
Reish said he's helped a few broker-dealers with such Reg BI-related rollover policies. "With one I helped develop a rollover recommendation process," Reish said. "With others I helped them develop rollover education materials. Rollover education, if done properly, is not a recommendation and, thus, is not subject to Reg BI."
SEC Chairman Jay Clayton warned advisors and broker-dealers on June 15 that they must take special care when recommending 401(k) or IRA rollovers and withdrawals, complex or risky products as well as coronavirus-related investments and SPACs, or special purpose acquisition corporations.
The application of Reg BI to recommendations of rollovers of and withdrawals from retirement accounts is one of the rule's "most significant enhancements over the status quo," Clayton said, and these recommendations "should be approached with care."
Broker-dealers and advisors should be "particularly attuned" to their regulatory obligations in light of the additional flexibility Congress recently provided investors to take withdrawals from certain accounts.
"Firms should recognize that these recommendations are subject to Reg BI and ensure that their policies and procedures meet the requirements of Reg BI, the Advisers Act and Form CRS, as appropriate," Clayton said.
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Melanie Waddell
Melanie is senior editor and Washington bureau chief of ThinkAdvisor. Her ThinkAdvisor coverage zeros in on how politics, policy, legislation and regulations affect the investment advisory space. Melanie’s coverage has been cited in various lawmakers’ reports, letters and bills, and in the Labor Department’s fiduciary rule in 2024. In 2019, Melanie received an Honorable Mention, Range of Work by a Single Author award from @Folio. Melanie joined Investment Advisor magazine as New York bureau chief in 2000. She has been a columnist since 2002. She started her career in Washington in 1994, covering financial issues at American Banker. Since 1997, Melanie has been covering investment-related issues, holding senior editorial positions at American Banker publications in both Washington and New York. Briefly, she was content chief for Internet Capital Group’s EFinancialWorld in New York and wrote freelance articles for Institutional Investor. Melanie holds a bachelor’s degree in English from Towson University. She interned at The Baltimore Sun and its suburban edition.
