FINRA Issues Notice to Firms on IRA Marketing Practices and Rollovers

In December, 2013, Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 13-45 to firms that market Individual Retirement Accounts (IRAs) and/or recommend rollovers or transfers for employees leaving employer-sponsored plans. According to FINRA, the Notice serves to “remind firms of their responsibilities” and make firms aware that there will be an increased focus by FINRA in 2014 on reviewing firm practices with respect to recommending and marketing IRAs. 

The Notice highlights FINRA rules 2210 and 2111, which regulate communication with the public and require broker-dealers and associated persons to meet a “suitability” standard when recommending a transaction or investment strategy to a customer.  The Notice also urges firms and registered representatives to assess any conflicts of interest that might exist.  When an advisor receives compensation for the total number of IRAs they open or receives commissions based on the amount of the asset transfer, a conflict of interest may arise because the advisor has an economic incentive to transfer assets to an IRA.  Advisors cannot let the conflict of interest overrule what is in the customer’s best interest.  FINRA released a “Report on Conflicts of Interest” on October 14, 2013 that highlights conflict management practices.  It may be accessed here:

Employees who terminate employment and are trying to decide what to do with the account in their employer-sponsored plan typically have four options:

1)      Leave the assets in the current account (if allowed).

2)      Roll over the assets to another employer-sponsored plan.

3)      Roll over the assets to an IRA.

4)      Take a cash distribution (possibly subject to 10% penalty and taxes).

Before making a recommendation to a customer, a registered representative should consider the following in determining what is most suitable between the different alternatives:

  • age
  • financial situation
  • other investments
  • risk tolerance
  • tax status
  • investment experience
  • liquidity needs
  • legal ramifications (like protection from creditors and legal judgment)
  • fees and expenses
  • differences in services
  • penalties for withdrawal
  • Required Minimum Distributions (RMDs)


When a financial advisor recommends that an employee roll over his retirement plan assets to an IRA, policies and procedures must be in place to ensure compliance with FINRA rules related to that recommendation. 


Financial advisors are specifically told to consider these factors when analyzing the alternatives:


1)      When the assets are in an employer sponsored account, the fees and expenses may be allocated among all plan participants, or paid by the employer entirely.  However, in an IRA the client will almost certainly be responsible for any expenses and fees and the level of fees may differ.

2)      In an employer-sponsored (qualified) plan, the client may be able to withdraw funds penalty-free between ages 55-59½. If the funds are in an IRA, they cannot be withdrawn before age 59½ without penalty.

3)      Loans may be allowed from the employer plan, but not from an IRA.

4)      IRAs are protected in bankruptcy litigation, but state laws vary for IRA protection from lawsuits. Funds in an employer-sponsored plan are typically shielded from any lawsuit or bankruptcy.

5)      If an employee holds employer stock, there can be immense tax implications for rolling over or liquidating the stock. On the other hand, employer stock can also add excess risk to an individual’s portfolio - meaning it may be beneficial to liquidate and/or rollover the stock, even if one loses the long-term capital gains treatment on appreciation of the stock.


Communications with the public when marketing IRAs and related services must be objective and based on principles of fair dealing and good faith.  Material provided cannot be misleading, false or exaggerated.  Discussions about fees must be fair and balanced and firms may not claim that an IRA is “free” or has “no fee” when there are costs related to the account. 

The bottom line is that firms that market IRA rollover services are charged with acting in the best interest of the customer.  Registered representatives for those firms need to be properly trained to understand the various complexities of the investment alternatives and must always place suitability for the customer ahead of their own financial interest. 

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