(b)lines Ask the Experts – Impact of SEC’s Regulation Best Interest

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning 403(b) plans and regulations.

“I’ve been reading a lot about this new SEC Regulation BI. Does it have any impact on me as a 403(b) plan sponsor?”


Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:


The new Securities and Exchange Commission (SEC) Regulation Best Interest (BI) primarily addresses the conduct of broker-dealers, which are entities that generally assist individuals with the purchases and sales of securities. However, they work with 403(b) plan sponsors as well, particularly with smaller sponsors and sponsors in certain industries, such as public school districts. Other plan sponsors may have legacy plan assets with broker-dealers as well, as the use of broker-dealers was commonplace in 403(b) plans decades ago.


Whether Regulation Best Interest has an impact on a 403(b) plan will largely turn on who the target audience is for a broker’s recommendation. Regulation Best Interest generally imposes a new “best interest” standard of care on broker-dealers when they make recommendations that are solely incidental to their brokerage business to “retail customers.” To comply with Regulation Best Interest, broker dealers are required to provide disclosures, comply with a “best interest” standard of care, and disclose or mitigate many conflicts.


In the 403(b) space, whether a recommendation will be covered by Regulation Best Interest will largely turn on who the recipient of the recommendation is and why they are using it. Under Regulation Best Interest, “retail customers” include natural persons who are investing primarily for personal, family, or household purposes and non-professional individuals acting on behalf of such individuals. In the preamble to Regulation Best Interest, the SEC clarifies that this means that if a broker makes a recommendation directly to a plan participant for a product or rollover that has not been negotiated and approved by a plan fiduciary then the recommendation to the plan participant is covered by Regulation Best Interest. However, the preamble also makes clear that recommendations to plan fiduciaries (except for fiduciaries of the smallest plans) are generally outside the scope of Regulation Best Interest.


In terms of practical impact, this could lead broker-dealers who provide advice directly to participants or who contract with participants to modify their services so that the 403(b) plan fiduciary would approve of the advice structure on behalf of the plan rather than negotiating with individual participants. Additionally, 403(b) plan fiduciaries may be asked by service providers to provide additional disclosures to participants to help facilitate their compliance with Regulation Best Interest should they or their affiliates provide covered recommendations to participants. One of the key changes from Regulation Best Interest, as adopted, and Regulation Best Interest, as proposed, is that Regulation Best Interest now expressly includes account type recommendations, such as recommendations that individuals open IRAs or move funds from a plan to an IRA. 


For more information on Regulation Best Interest and its impact on the retirement space, see this article on PLANSPONSOR.com’s sister website PLANADVISER.com.



NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.


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