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SEC issues bulletin with guidance for advisors on recommending investments

On Behalf of | Apr 27, 2023 | Regulatory Investigations

The Securities and Exchange Commission has issued a staff bulletin providing guidance for broker-dealers and investment advisors on their investment recommendations for clients, Investment News reports.

The SEC published its bulletin in the form of questions and answers reiterating the standards of conduct for advisors in addressing their care obligations when providing investment advice and recommendations to retail investors.

It focused on the Care Obligation of Regulation Best Interest (Reg BI) for broker-dealers and the duty of care enforced under the Investment Advisers Act of 1940.

The guidance was aimed at clarifying the responsibilities of brokers, advisors and their firms, who were reminded of care obligations that generally include three components:

–Understanding the potential risks, rewards, and costs associated with a product, investment strategy, account type, or series of transactions.

–Having a reasonable understanding of the investor’s investment profile, including their overall financial situation, investment time horizon, risk tolerance, investment objectives, liquidity needs and financial goals.

–Considering reasonably available alternatives in deciding whether the recommendation or advice given is in the investor’s best interest.

The SEC emphasized that brokers and advisors must have sufficient information in order to make a recommendation that is in the best interest of the investor.

“What constitutes sufficient information may change based on the investments or investment strategy being recommended or advised, or where the firm is aware or has reason to be aware that information in the investment profile has changed (e.g., birth of a child, marriage/divorce, retirement) or contains information that is inconsistent (e.g., a profile that contains multiple investment objectives that appear inconsistent with each other),” the bulletin states.

Broker-dealers are expected to have updated information regarding a retail investor’s investment profile and objectives before making a recommendation, and to adjust their advice if circumstances have changed.
The latest staff bulletin follows two bulletins issued last year, regarding account recommendations and managing conflicts of interest.

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