FINRA’s continued focus on account recommendations and rollovers is evident in its 2025 FINRA Annual Regulatory Oversight Report (the Report), Based on the Report, broker-dealers and their registered representatives (advisors) should ensure that account transfers and rollover recommendations are evaluated based on all relevant factors, that the recommendation aligns with the investor’s financial circumstances and investment objectives, and that the investor receives adequate disclosures.
In its Report, FINRA identifies a number of issues it has uncovered during its regulatory examinations that directly address account recommendations and rollover recommendations and sets forth effective practices to address these issues. These issues and FINRA’s recommended effective practices are discussed below.
Compliance with the Reg BI Standard of Care
By way of background, the Reg BI standard of care applies to recommendations to a retail customer – such as an individual or plan participant – as to a securities transaction or an investment strategy involving securities and it includes account recommendations. In other words, the Reg BI standard of care applies not only to the advice about whether a plan participant should rollover plan assets or whether an IRA owner should transfer his/her IRA but also to the account type into which the assets should be rolled over or transferred and how the assets should be invested. In its findings regarding satisfaction of this obligation, FINRA notes that there have been instances of a failure –
to consider or compare relevant costs and fees, such as product or account-level fees, when recommending a product or when determining whether to recommend transactions in a customer’s brokerage or advisory account or to recommend transfers of securities between brokerage and advisory accounts…
and failing to have written policies and procedures reasonably designed or enforced with respect to account recommendations, for example, by not being reasonably designed to address recommended transfers of products between brokerage and advisory accounts or rollover recommendations; (Emphasis in bold added by us)
Costs are an important consideration in evaluating whether to recommend rollovers and account transfers, but FINRA also points out that other relevant factors need to be considered. In describing the relevant factors to be considered, the SEC in Reg BI references the factors set forth in FINRA Regulatory Notice 13-45 – including fees and expenses, level of service available and available investment options – and points out that the relevance and importance of any one particular factor is dependent upon the particular customer. In the Report, FINRA highlights the importance of considering an investor’s reasonably available alternatives and whether the recommendation aligns with the investor’s financial situation and investment goals stating that an effective practice includes:
- advising that reasonably available alternatives be considered before a recommendation has been formulated;
- using worksheets, in paper or electronic form, to compare costs and reasonably available alternatives;
- creating notes or documents in a similar format to evaluate recommended transactions and provide information on the retail customer’s financial situation, needs and goals (and substantiate why that specific recommendation was in the retail customer’s best interest);
In the context of a plan rollover recommendation, an investor’s other reasonably available alternatives include staying in the plan, taking a taxable distribution, rolling over to an IRA and, if the investor is switching jobs, rolling into the new employer’s plan (assuming the new plan accepts rollover contributions). The costs, services, investments and other relevant factors for each of these alternatives should be considered in evaluating which alternative is in the investor’s best interest as based upon the investor’s investment objectives and financial needs. This approach to evaluating rollover recommendations is similar to the process described by the DOL in prohibited transaction exemption (PTE) 2020-02 which allows advisors to receive conflicted compensation resulting from nondiscretionary fiduciary investment advice to private sector tax-qualified and ERISA-governed retirement plans, participants in those plans, and IRA owners. However, while the DOL’s PTE applies to private sector plans, the Reg BI standards apply to all retirement plans, including church plans and government plans.
Adequate Disclosure
The Report also states that FINRA has found that there have been failures to disclose material fees and other relevant factors tied to plan rollover recommendations. To address this, FINRA states that an effective practice is –
Providing retail customers with clear, accessible materials that allow them to compare the features, benefits and costs of certain account type recommendations (e.g., rollovers).
Some firms already implement this practice by providing investors with educational materials that set forth the pros and cons of staying in the current plan or IRA as compared to rolling it over to an IRA with the advisor. These materials usually describe the relevant considerations for each option including the fees, services and investments. Advisors who need to rely on PTE 2020-02 for a rollover recommendation need to satisfy a similar disclosure and documentation obligation in order to comply with the PTE and therefore, may already have these documents in place.
Conclusion
Broker-dealers can address the concerns highlighted by FINRA in the Report by ensuring that there are policies and procedures in place to evaluate rollovers and account recommendations based on all relevant factors and ensure that disclosures to investors are accurate and complete. Broker-dealers should also train and supervise advisors to carry out these processes and procedures and, for risk mitigation, to document the evaluation process.
