A top US financial regulator said money managers and brokers should consider whether there are alternatives to complex or risky products like digital assets or derivatives before recommending them to retail clients.
(Bloomberg) — A top US financial regulator said money managers and brokers should consider whether there are alternatives to complex or risky products like digital assets or derivatives before recommending them to retail clients.
That doesn’t mean they can’t suggest those products or others that the SEC considers risky for retail traders — like inverse or leveraged exchange-traded funds. Rather, it means they should apply “heightened scrutiny,” the US Securities and Exchange Commission said in a bulletin. That includes understanding the risks, rewards and costs of those products, it said.
The guidance is the latest to the asset-management industry about its duties and obligations to act in the best interest of its clients. The agency said investment advisers and brokers need to have a full understanding of the individual retail client’s profile, including the customer’s investment goals, tax status and other factors before offering advice or recommending financial products, the SEC said.
“You will not be able to have a reasonable belief that a recommendation or advice is in a retail investor’s best interest without sufficient information” about the investor, staff wrote.
An SEC staff bulletin in August 2022 warned brokerages about conflicts of interest tied to pay. Another put brokers on notice about how to help clients choose which types of accounts to open.
The missives don’t carry the weight of law but are closely watched by industry players seeking to stay abreast of the regulator’s expectations and to help avoid enforcement actions.
The agency believes asset managers and brokers should have enough information to be in compliance thanks to the three advisories, a senior SEC staffer told reporters on Thursday.
The guidance springs from controversial policymaking during the last several presidential administrations about what it means for brokers or financial advisers to act in their clients’ best interest.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.