If an advisor is not going to recommend the lowest-cost product or strategy available to meet a client’s investment objectives, they should be prepared to defend that decision to Securities and Exchange Commission examiners, attorneys say.

A group of securities attorneys at Drinker, Biddle, many of them former securities regulators, are unpacking Regulation Best Interest and the SEC’s most recent RIA guidance to explain to their advisor clients not only what the new conduct rules say, but how they are likely to be applied by examiners when the regulations go live in June.

One key area of the regs that advisors should focus on if they are aiming for squeaky clean regulatory exams is SEC examiner expectations regarding advisors’ use of lowest-cost recommendations, James Lundy, a partner at the firm, wrote in a primer for the firm’s RIA clients.

This is true despite the fact that the SEC’s RIA guidance affirms the recognized view—of at least the SEC policy divisions—that recommending the lowest-cost product or strategy is not required, he said.

“This aspect of the guidance, however, needs to be tempered by the reality that many of their fellow staff members in the Division of Enforcement and the Office of Compliance Inspections and Examinations have historically regularly departed from the policy divisions’ view through their investigative and examination tactics with registrants and continue to do so,” Lundy said.

The RIA guidance specifically provides that “when considering similar investment products or strategies, the fiduciary duty does not necessarily require an adviser to recommend the lowest cost investment product or strategy,” he said.

The RIA guidance, however, also states that in situations in which the lowest-cost investment or strategy is not recommended, there should be consideration of “other factors about the investment or strategy that outweigh cost and make the investment or strategy in the best interest of the client, in light of that client’s objectives,” he said.

“Unfortunately, the SEC chose not to provide more details on the other factors that should be considered,” Lundy said.

That leaves much room or interpretation by both examiners and the industry. “Firms need to be vigilant that their compliance and supervisory practices, policies, and procedures are strong in this area, and further that the recommendations made to place a client in a higher-cost investment or strategy are fully supportable and well documented,” law firm partner Fred Reish wrote in the primer.

Rollovers will also continue to be a hot button during advisor exams, the law firm's attorneys said.

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