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Difficulty: HardRegulation Best Interest (Reg BI) and Form CRS Requirements

A registered representative recommends that a retail customer roll over assets from a workplace 401(k) plan into a traditional IRA at the representative's broker-dealer. Prior to making the recommendation, the representative provides Form CRS to the retail customer and discloses all account fees, compensation, and potential firm conflicts. However, the representative fails to evaluate the features, investment options, administrative fee structures, and loan provisions of the existing 401(k) plan relative to the proposed IRA. Which specific obligation under Regulation Best Interest (Reg BI) did the representative violate?

  1. The Care Obligation, because evaluating reasonably available alternatives, including economic factors and features of the current 401(k) plan, is required when recommending an account rollover.Answer
  2. B
    The Disclosure Obligation, because disclosing IRA fees verbally and delivering Form CRS does not fulfill the requirement to provide a written comparative fee analysis document prior to recommendation.
  3. C
    The Conflict of Interest Obligation, because recommending an asset rollover that increases compensation for the broker-dealer is a per se prohibited conflict of interest under SEC rules.
  4. D
    The Form CRS Delivery Obligation, because Form CRS must be re-delivered specifically at the moment the rollover trade order is executed rather than prior to the recommendation.

Answer

The representative violated the Care Obligation under Regulation Best Interest because recommending an account rollover requires analyzing the customer's existing 401(k) plan options, costs, and benefits against the proposed IRA.
The correct answer emphasizes that under SEC Regulation Best Interest (SEC Rule 15l-1), account recommendations—specifically IRA rollovers from employer-sponsored plans—are subject to the Care Obligation. To act in the retail customer's best interest, a representative must evaluate factors such as relative costs, available investment options, administrative fees, and plan features (e.g., loan provisions or protection from creditors) before recommending a transfer.

Step-by-Step Solution

1
Identify the scope of Regulation Best Interest (Reg BI) regarding account type recommendations.
Reg BI explicitly covers recommendations of securities transactions and investment strategies involving securities, which includes account type recommendations such as rolling over funds from a 401(k) to an IRA.
Account recommendations significantly impact retail customer costs, investment options, and services.
2
Analyze the four core obligations under Reg BI (Disclosure, Care, Conflict of Interest, and Compliance).
The Care Obligation specifically requires the representative to exercise reasonable diligence, care, and skill when making recommendations.
Proper exercise of care requires considering reasonably available alternatives and comparing the current plan's costs, investment choices, and features with the recommended IRA.
3
Evaluate the representative's actions against the Care Obligation requirements.
Because the representative failed to analyze the client's current 401(k) plan features and costs, the representative lacked a reasonable basis to conclude that the rollover recommendation was in the customer's best interest.
Disclosure of fees and delivery of Form CRS fulfill separate requirements but do not substitute for performing the necessary comparative analysis under the Care Obligation.

Key Concept

Reg BI Care Obligation for Account Rollover Recommendations

Hints

1
Consider which component obligation of Reg BI governs the duty of reasonable diligence and analysis when making recommendations to retail customers.
2
Reg BI covers account type recommendations, including IRA rollovers. Think about which obligation requires comparing the features of the current workplace plan against the proposed IRA.
3
Disclosing fees fulfills the Disclosure Obligation, but failing to evaluate available options and cost comparisons breaks the requirement to exercise skill, care, and diligence.

Practice More

Review FINRA Regulatory Notice 20-14 and SEC Guidance regarding Reg BI Care Obligation requirements for IRA rollover recommendations.
Estimated Time:2m 0s
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Topics

Regulation Best Interest (Reg BI) and Form CRS Requirements

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