Among other things, FINRA is focusing on services and recommendations by broker-dealers and their registered representatives to retirees, senior investors and investors with diminished capacity.

The Report has one part that specifically focuses Reg BI’s application to plan-to-IRA  and IRA-to-IRA transfer recommendations. Here is what it says. The bolding is mine.

When making account rollover or transfer recommendations, including retirement accounts:

• Do your firm and its associated persons ensure that they have a reasonable basis to believe that the rollover or transfer itself, the account type being recommended, and any securities or investment strategies recommended are in the retail customer’s best interest; and

Comment: As the bolded language says, there are three distinct recommendations in a plan-to-IRA rollover or an IRA-to-IRA transfer. The first is to leave the current account (e.g., to sell the plan investments and take the money out of the plan); the second is the destination account (that is, should the money go into an IRA, a brokerage account, etc.); and the third is how the money should be invested once it is in the destination account. Under Reg BI, all three of those recommendations must be in the best interest of the “retail investor” which includes participants and IRA owners.

• Do your firm and its associated persons consider, in addition to the general considerations for all account and securities recommendations, specific factors potentially relevant to rollovers or transfers, such as costs (e.g., costs associated with closing out securities, if the customer has to sell them as a result of the recommendation to transfer), level of services available, features of the existing account, 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 ERISA fiduciary rules for recommending rollovers, Reg BI requires a comparative analysis of the investor’s current arrangement with the arrangement that the broker-dealer and registered representative contemplate providing to the participant. That includes, at the least, a comparative analysis of the investments, services, and costs in the plan and the contemplated IRA, and a determination of which alternative is in the best interest of the participant. In this regard, the DOL, SEC and FINRA are in alignment.

The Report continue to discuss account type recommendations in the context of management of conflicts of interest:

With respect to account recommendations, does your firm consider the following non-exhaustive list of practices that can help your firm meet its obligations with respect to conflicts of interest by:

• avoiding compensation thresholds that disproportionately increase compensation through openings of certain account types;
• adopting and implementing policies and procedures reasonably designed to minimize or eliminate incentives, including both compensation and non-compensation incentives, for employees to favor one type of account over another;
• implementing supervisory procedures to monitor recommendations that involve the rollover or transfer of assets from one type of account to another (such as recommendations to roll over or transfer assets in an Employee Retirement Income Security Act of 1974 (ERISA) account to an IRA); and
• adjusting compensation for financial professionals who fail to adequately manage conflicts of interest associated with account recommendations?

Comment: The conflict of interest in a rollover recommendation or IRA transfer recommendation is that the broker-dealer and the registered representative will make money if the rollover/transfer recommendation is accepted and implemented, but will not if the money is not transferred. In some scenarios, a conflict can be managed by minimizing or eliminating the financial incentives, but that is not possible with plan rollovers or IRA transfers, because in those cases the compensation is earned only if there is a rollover/transfer…it’s an all or nothing scenario. Because of that, the only effective conflict management technique is to have a robust process for gathering and evaluating the information needed to determine which option is in the best interest of the participant or IRA owner.

However, the Report goes beyond issues related to rollovers and IRA transfers. It also discusses  issues related to senior investors, who, to a degree, are synonymous with retirees. Here’s what the Report said about senior investors.

Effective Practices

► Training: Conducting training, for both front office and back office staff, on the warning signs of potential: (1) customer exploitation; (2) diminished capacity; or (3) fraud perpetrated on the customer.

► Escalation Process: Implementing and training registered representatives to use a comprehensive process to escalate issues relating to seniors, including but not limited to concerns about financial exploitation, diminished capacity or cognitive decline.

            …..

► Senior Investor Specialists: Establishing specialized groups or appointing individuals to handle situations involving elder abuse or diminished capacity; contacting customers’ TCPs—as well as Adult Protective Services, regulators and law enforcement, when necessary—and guiding the development of products and practices focused on senior customers.

Comment: It goes without saying that FINRA is focusing on issues related to seniors. The Baby Boomers are reaching age 65 at the rate of over 11,000 a day and the oldest Boomers are approaching age 80. This massive generation—with 401(k) plans, IRAs and some personal wealth—is likely a target for investment schemes and scams. As their cognitive abilities decline, they can more easily be separated from that wealth by bad actors. While good advisors will be of significant value to these older Americans, the regulators—and especially the SEC and FINRA—will increase their surveillance of sales and advice practices to this demographic segment. Broker-dealers and RIAs should review their practices and procedures for dealing with older clients and for protecting them as they decline. Past practices may not be enough going forward.

Conclusion

The message in this article is that “forewarned is forearmed”. Both FINRA and the SEC will be examining rollover practices for both the best interest standard and conflicts mitigation. The regulators’ concerns can be addressed by practices, policies and supervision for gathering and evaluating the information needed to make a best interest recommendation.

On the other hand, the issues related to senior investors and declining cognitive ability is more difficult to manage. The concerns can be managed, to a degree, by  the quality and costs of recommended investments and strategies—in a manner appropriate for a senior investor with impaired cognitive abilities. However, it also involves spotting suspicious activities of family members and strangers alike. In some cases, a firm or its advisor may suspect that a request for money by a senior investor is not appropriate. Firms need to have reasonable policies to deal with those types of circumstances.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.