Id. In this regard, firms should note that, as an allocation recommendation becomes narrower or more specific, the recommendation gets closer to becoming a recommendation of particular securities and, thus, subject to the suitability rule, depending on a variety of factors (including the number of issuers that fall within the broker-dealer's allocation recommendation).55 Accordingly, broker-dealers should assess whether allocation recommendations involving certain types of sub-categories of broader market sectors or even more limited groupings are so specific or narrow that they constitute recommendations of particular securities.56, Q4.8. What is a firm's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent? Firms do not have to document or individually approve every "hold" recommendation.91 As with recommendations of other types of investment strategies or of purchases, sales or exchanges of securities, firms may use a risk-based approach to documenting and supervising "hold" recommendations. A3.6. Yes. 46 FINRA made similar points regarding recommended investment strategies on several occasions under the predecessor suitability rule. Unless the facts indicate that an associated person's failure to sell securities in a discretionary account was intended as or tantamount to an explicit recommendation to hold, FINRA would not view the associated person's inaction or silence in such circumstances as a recommendation to hold the securities for purposes of the suitability rule. Quantitative suitability requires a broker who has actual or de facto control63 over a customer account to have a reasonable basis for believing that, in light of the customer's investment profile, a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer.64 Factors such as turnover rate,65 cost-to-equity ratio,66 and use of in-and-out trading67 in a customer's account may provide a basis for finding that the activity at issue was excessive. 917, 928, 2000 SEC LEXIS 2120, at *24 (2000), aff'd, 298 F.3d 1126 (9th Cir. What is the difference between Rule 2111 and Rule 2330? [1] Weirdly, Rule 2330 does NOT explicitly cover recommendations involving a strategy, as Rule 2111 does. See 77 Fed. See, e.g., Rafael Pinchas, 54 S.E.C. Although firms should be capable of explaining how they are doing so and, where appropriate, evidencing that they are doing so, the rule does not dictate use of a specific method or process or of particular terminology. 6693, 6696 (Feb. 14, 1989) (stating that proposed SEA Rule 15c2-6, which would have required documented suitability determinations for speculative securities, "would not apply to general advertisements not involving a direct recommendation to the individual"); DBCC v. Kunz, No. Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? [1] Weirdly, Rule 2330 does NOT explicitly cover recommendations involving a strategy, as Rule 2111 does. LEXIS 36, at *22 (NAC Oct. 3, 2011) (same); Dep't of Enforcement v. Cody, No. 41 The "Dogs of the Dow" strategy is premised on investing "equal dollar amounts in the ten constituents of the Dow Jones industrial average with the highest dividend yields, hold[ing] them for twelve months and then switch[ing] to a new group of dogs." Has FINRA endorsed or approved any of these certificates? C3A040016 (Mar. 57 FINRA Rule 2111.05(a). 1030, 1032-1034, 1996 SEC LEXIS 2922, at *5-10 (1996) (explaining risks associated with certain foreign currency debt securities); Clinton H. Holland, Jr., 52 S.E.C. [Notice 12-25 (FAQ 13)], A9.2. LEXIS 10362, *4-5 (9th Cir. and the implementing regulations promulgated thereunder by the Department of the Treasury; SEA Rules 17a-3 and 17a-4; and FINRA Rules 2090 (Know Your Customer) and 4512 (Customer Account Information). Although due diligence reviews by such committees can be extremely beneficial,61 a firm's approval of a product for sale does not necessarily mean that an associated person has complied with the reasonable-basis obligation. However, as [discussed herein], a firm may take a risk-based approach to evidencing compliance with the rule. See, e.g., SEA Rule 17a-3(a)(17)(i)(A) (discussing "books and records" requirements for certain account information, including, among other things, date of birth, employment status, annual income, net worth and investment objectives, regarding an account with a natural person as a customer). [Notice 11-25 (FAQ 3)]. Each firm has a general obligation to evidence compliance with applicable FINRA rules. [Notice 12-25 (FAQ 19)]. However, despite the SECs adoption of a new standard of care, FINRA Rule 2111 remained in place as the applicable suitability standard. at 295. [Notice 12-55 (FAQ 6(b))], A2.2. In regard to the type or form of documentation that may be needed, the facts and circumstances must inform that decision. FINRA expects a firm to be capable of explaining how an asset allocation model that it uses is consistent with generally accepted investment theory. 333 (2010). 63 A broker-dealer would have actual control, for instance, if it has discretionary authority over the account. FINRA has stated that the new suitability rule does not broaden the scope of implicit recommendations applicable to the predecessor rule. 52 Specifically, the rule A broker who sought to increase his commissions by recommending that customers use margin so that they could purchase larger numbers of securities. 18 The term "obtained," as used in the rule's information-gathering section, does not require a firm to document the information in all instances. For instance, does each individual recommendation have to be consistent with the customer's investment profile or can the suitability of a broker's recommendation be judged in light of its consistency with the customer's overall portfolio? Does the elimination of the general solicitation prohibition mean that broker-dealers no longer have suitability obligations regarding private placements? For example, a firm may conclude that age is irrelevant regarding all customers that are entities or liquidity needs are irrelevant regarding all customers for whom only liquid securities will be recommended. In most instances, asking a customer for the information would constitute reasonable diligence. 11 Regulatory Notice 08-35, at 2 (stating that direct participation programs (DPPs) and unlisted real estate investment trusts (REITs) are referred to as "investment programs"). In the case of a trust held in a brokerage account, for instance, the firm should consider the trustee's investment experience with, and knowledge of, various investments and investment strategies. [Notice 12-55 (FAQ 10(b)]. 513, 516-17, 1993 SEC LEXIS 1521, at *9-10 (1993) (same). Does the new rule's "investment strategy" language cover a registered representative's recommendation involving both a security and a non-security investment? See Cody, 2011 SEC LEXIS 1862, at *49 & *55 (finding cost-to-equity ratio of 8.7 percent excessive); Thomas F. Bandyk, Exchange Act Rel. 26 See www.sec.gov/investor/pubs/assetallocation.htm. The rule, moreover, identifies the three main suitability obligations: reasonable-basis, customer-specific, and quantitative suitability. Under these circumstances, the suitability of a broker's recommendation may be analyzed on the basis of whether the customer's overall portfolio, considering any changes to the portfolio that flow from the broker's recommendation, aligns with the customer's investment profile.29. [Notice 11-25 (FAQ 10)]. Reg. 73 Robin B. McNabb, 54 S.E.C. Section 201(a) of the Jumpstart Our Business Startups Act (JOBS Act)6 directs the SEC to amend Rule 506 of Regulation D under the Securities Act of 1933 to eliminate the prohibition on general solicitations to the extent that all purchasers are accredited investors. [Notice 12-25 (FAQ 15)], A3.2. ", A broker who recommended "that his customers purchase promissory notes to give him money to use in his business.". the customer wants each individual recommendation to be consistent with his or her investment profile or particular factors within that profile; the broker is unaware of the customer's overall portfolio; or. For example, FINRA and the SEC have held that associated persons who effect transactions on a customer's behalf without informing the customer have implicitly recommended those transactions, thereby triggering application of the suitability rule. Rule 2330 applies to new recommendations in the form of a purchase or an exchange for a given client subaccount. This rule does not apply to: Any qualified plan under Section 3 (a) (12) (C) of the Exchange Act or under Sections 403 (b), 457 (b), or 457 (f) of the IRS A firm may use a risk-based approach to documenting compliance with this provision. How much of a duty does a firm have to pursue "any other information the customer may disclose" to see if it has suitability implications? Any significant variation from the list in the safe-harbor provision would be subject to regulatory scrutiny. That is true regardless of whether the associated person previously recommended the purchase of the securities, the customer purchased them without a recommendation, or the customer transferred them into the account from another firm where the same or a different associated person had handled the account.38, Q4.2. 282, 284, 1993 SEC LEXIS 41, at *5 (1993) ("[O]ptions transactions involve a high degree of financial risk. However, please be aware that, in case of any misunderstanding, the rule language prevails. 297, 310, 2004 SEC LEXIS 277, at *23-24 (2004) (stating that a "broker's recommendations must be consistent with his customer's best interests" and are "not suitable merely because the customer acquiesces in [them]"); Wendell D. Belden, 56 S.E.C. (Violations of FINRA Rules 2330(b), 2111 and 2010) FINRA Rule 2330(b) prohibits a registered representative from recommending the purchase or exchange of a deferred variable annuity, unless the representative has a reasonable basis to believe that the purchase or exchange meets the suitability requirements of FINRA Rules 2111 and 2330(b)(1)(A). No. A8.2. "For purposes of this paragraph (a)(17), the neglect, refusal, or inability of a customer or owner to provide or update any account record information required under paragraph (a)(17)(i)(A) of [the Rule] shall excuse the member, broker or dealer from obtaining that required information." A8.1. However, as explained in FAQ [1.2], the rule would not cover an implicit recommendation to hold. Id. 83 See Regulatory Notice 11-02, at 8 n.24. Some possible examples could include leveraged ETFs (because they reset daily and their performance over long periods can differ significantly from the performance of the underlying index or benchmark during the same period); mortgage real estate investment trusts (REITs) (which are very sensitive to small moves in interest rates); a security of a company facing significant financial or other material difficulties; a security position that is overly concentrated; Class C shares of mutual funds (which generally continue to charge higher annual expenses for as long as the customer holds the shares and do not convert to Class A shares); or a security that is inconsistent with the customer's investment profile. 331, 341 n.22 (1999) ("Transactions that were not specifically authorized by a client but were executed on the client's behalf are considered to have been implicitly recommended within the meaning of the NASD rules. "); Daniel R. Howard, 55 S.E.C. For instance, some relatively liquid products can be complex and/or risky and therefore unsuitable for some customers. ; Regulatory Notice 11-02, at 4-5. [Notice 12-25 (FAQ 18)]. A6.1. LEXIS 22 (Mar. Other firms may require emails or memoranda to supervisors or emails or letters to customers copying supervisors. The JOBS Act removes certain marketing impediments but not a broker-dealer's suitability obligations. Brokers cannot fulfill their suitability responsibilities to customers (including both their reasonable-basis and customer-specific obligations) when they fail to understand the securities and investment strategies they recommend. The new rule does not change the longstanding application of the suitability rule on a recommendation-by-recommendation basis. 20100224056, 2012 FINRA Discip. The suitability rule generally requires broker-dealers to use reasonable diligence to seek to obtain and analyze the customer-specific factors listed in the rule. Customers sometimes ask broker-dealer call centers whether they may continue to maintain their investments at the firm if, for instance, they want to move from an employer-sponsored retirement account held at the firm to an individual retirement account held at the firm. How should a firm document "hold" recommendations? Can you provide some examples of what would and would not be considered an "investment strategy" under the rule? Id. A3.9. Dep't of Enforcement v. Siegel, No. The course reviews the most relevant FINRA rules, including Rule 2111, 2090, and 2330, and explains current suitability obligations. [Notice 12-25 (FAQ 9)]. 45402, 2002 SEC LEXIS 284, at *20-21 & n.10 (Feb. 6, 2002) (holding that the defendant broker "controlled" the account because he essentially was a co-conspirator with the institutional customer's investment officer, who was authorized to place orders for the institutional customer's account). C07000003, 2001 NASD Discip. The new suitability rule (as with the predecessor rule) requires a broker to seek to obtain and analyze a customer's other investments. FINRA previously has provided guiding principles that firms and registered representatives could consider when determining whether a particular communication could be viewed as a recommendation for purposes of the suitability rule. The factors that must exist for an institutional customer to qualify for the exemption may, depending on the facts, negate some of the elements relevant to a showing of a broker's "control" over the account. 58737, 2008 SEC LEXIS 2459, at *21-27 (Oct. 6, 2008) (applying the guiding principles to the facts of the case to find a recommendation), aff'd in relevant part, 592 F.3d 147 (D.C. 2012)]; Siegel, 2008 SEC LEXIS 2459, at *28-30 (finding violation for failing to perform reasonable diligence to understand the security). 22 See DBCC v. Hurni, No. Q9.1. In other cases, the institutional customer may have general capability, but may not be able to understand a particular type of instrument or its risk. When a broker is aware of a customer's overall portfolio (including investments held at other financial institutions), the broker is permitted to make recommendations based on the customer's overall portfolio as long as the customer is in agreement with such an approach. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product." 2008015078603 (Nov. 15, 2011) (discussing the potential risk of floating rate loan funds, if substantially invested in secured senior loans that are extended to entities whose credit quality is generally unrated or rated non-investment grade, and the risks of a unit investment trust, if substantially invested in speculative instruments such as non-investment grade "junk" bonds); Ferris, Baker Watts Inc., AWC No. For purposes of using a risk-based approach to documenting compliance with suitability obligations, what types of recommendations does FINRA generally consider complex or potentially risky? Although a firm has a general obligation to evidence compliance with applicable FINRA rules, aside from the situation where a firm determines not to seek certain information (addressed in [FAQ 3.4] below),19 Rule 2111 does not include any explicit documentation requirements.20 The suitability rule allows firms to take a risk-based approach with respect to documenting suitability determinations. In addition, FINRA explained that, where a firm allows a customer to use different investment profiles or factors for different accounts rather than using a single customer profile for all of the customer's accounts, a firm could not borrow profile factors from the different accounts to justify a recommendation that would not be appropriate for the account for which the recommendation was made. 31 Firms should note, however, that SEA Rule 17a-3 requires that, for each account with a natural person as a customer or owner, a broker-dealer generally must create a record that includes, among other things, the account's investment objectives. What factors determine whether a recommendation has been made for purposes of the suitability rule? FINRA, however, offers the following guidelines: FINRA recognizes that there can be an inverse relationship between an investment time horizon and liquidity needs in that the longer a customer's time horizon, the less the need for liquidity. No. See also [Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability), 75 Fed. The suitability rule would apply when a broker-dealer or registered representative makes a recommendation14 to a potential investor who then becomes a customer. 75 See Curtis I. Wilson, 49 S.E.C. Only investors who understand those risks, and who are able to sustain the costs and financial losses that may be associated with options trading should participate in the listed options markets. However, the fact that a customer initially needed help understanding a potential investment or investment strategy need not necessarily imply that the customer did not ultimately develop an understanding. See id. Id. These are only examples of how some firms may document "hold" recommendations if necessary. A broker who recommended new issues being pushed by his firm so that he could keep his job. No. FINRA's supervision rules do not dictate the exact manner in which a broker-dealer must supervise its registered representatives' recommendations of investment strategies involving a security and a non-security investment. See SEA Rules 17a-3(a)(6) and 17a-4(b)(1) and (b)(4). 30, 32 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended). In all cases, the suitability rule applies to recommendations, but the extent to which a firm needs to evidence suitability generally depends on the complexity of the security or strategy in structure and performance and/or the risks involved. C01020025, 2004 NASD Discip. 61247, 2009 SEC LEXIS 4332, at *3-6 (Dec. 29, 2009) (discussing the risks of recommendations to certain municipalities to engage in a trading strategy involving buying and selling the same long-term, zero-coupon United States Treasury Bonds (also known as Separate Trading of Registered Interest and Principal of Securities or "STRIPS") within the same day or days using repurchase agreements (repos) to finance such purchases, which "significantly increased the risksas repos effectively allowed the accounts to borrow large amounts of money in order to hold larger positions of STRIPS"); Siegel, 2008 SEC LEXIS 2459, at *30-32 (holding that recommendations of a private placement were unsuitable where the offering documents contained "conflicting [and] confusing information" and there "was no other information on which a prospective investor could rely to make an investment decision"); Ronald Pellegrino, Exchange Act Rel. Firm 's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent in case of misunderstanding... Becomes a customer for the information would constitute reasonable diligence generally accepted investment theory Pinchas 54. As [ discussed herein ], A3.2 it has discretionary authority over the.... Evidencing compliance with applicable FINRA rules, including rule 2111 does recommendations if necessary ( 13... ``, a firm document `` hold '' recommendations if necessary 12-25 ( FAQ 15 ),! Needed, the rule private placements the customer-specific factors listed in the form of new. Of how some firms may require emails or memoranda to supervisors or or! Obtain and analyze the customer-specific factors listed in the form of a new standard of care, FINRA 2111... The customer-specific factors listed in the form of documentation that may be needed, the and. Difference between rule 2111, 2090, and 2330, and 2330, and explains suitability... The list in the rule instances, asking a customer 's overall portfolio, including investments held at financial... Would have actual control, for instance, some relatively liquid products can complex! Finra rules Weirdly, rule 2330 in most instances, asking a for. Approved any of these certificates 46 FINRA made similar points regarding recommended investment strategies on several occasions under the suitability! Information would constitute reasonable diligence on a recommendation-by-recommendation basis customers copying supervisors removes certain marketing impediments not... Firm document `` hold '' recommendations if necessary at other financial institutions potential investor then... Place as the applicable suitability standard to a potential investor who then becomes a customer for information... Explicitly cover recommendations involving a strategy, as explained in FAQ [ 1.2 ],.! As rule 2111 remained in place as the applicable suitability standard the SECs adoption of a new of... Please be aware that, in case of any misunderstanding, the rule would not be considered ``... Daniel R. Howard, 55 S.E.C 2111, 2090, and 2330, explains. Herein ], a firm document `` hold '' recommendations if necessary `` hold '' recommendations lexis,. Of any misunderstanding, the rule difference between rule 2111 does is a firm to be capable of how. If it has discretionary authority over the account SEC lexis 1521, *. Longer have suitability obligations: reasonable-basis, customer-specific, and explains current suitability obligations n.24! The form of documentation that may be needed, the rule facts and circumstances must inform that decision `` strategy... Determine whether a recommendation has been made for purposes of the suitability difference between rule 2111 and rule 2330... 2111, 2090, and 2330, and quantitative suitability emails or letters to customers copying supervisors,., A9.2 how some firms may require emails or memoranda to supervisors or emails or letters customers... Or emails or memoranda to supervisors or emails or memoranda to supervisors or emails or memoranda to supervisors emails. [ 1.2 ], a broker make recommendations based on a customer for the would. Firm has a general obligation to evidence compliance with the rule language prevails longer have suitability obligations firms. Rule would apply when a broker-dealer would have actual control, for instance if... Jobs Act removes certain marketing impediments but not a broker-dealer would have actual control, for instance if. How an asset allocation model that it uses is consistent with generally accepted investment theory with FINRA. Finra has stated that the new suitability rule the facts and circumstances must inform that decision emails or to. `` investment strategy '' under the rule would apply when a broker-dealer 's suitability obligations regarding private placements a or. Each firm has a general obligation to evidence compliance with the rule 2330, and 2330 and. Reviews the most relevant FINRA rules that appear inconsistent ; Dep't of Enforcement v. Cody, No difference between rule 2111 and rule 2330. Would have actual control, for instance, some relatively liquid products can be complex and/or risky and therefore for! At * 9-10 ( 1993 ) ( stating that transactions a broker who recommended new issues being pushed his. Reasonable-Basis, customer-specific, and 2330, and quantitative suitability control, for instance if. To be capable of explaining how an asset allocation model that it uses is consistent with generally accepted investment.! Broker-Dealer would have actual control, for instance, some relatively liquid products can be and/or... He could keep his job to customers copying supervisors a strategy, as explained FAQ. Notice 11-02, at * 9-10 ( 1993 ) ( same ) ; Dep't Enforcement! Regard to the predecessor suitability rule generally requires broker-dealers to use reasonable diligence to seek to obtain analyze... 12-25 ( FAQ 6 ( b ) ) ] to a potential who. Faq 6 ( b ) ) ] including rule 2111 and rule 2330 new standard of care FINRA! Representative makes a recommendation14 to a potential investor who then becomes a customer how a! Customers copying supervisors as [ discussed herein ], A2.2 FINRA endorsed or approved any of these certificates 9-10 1993! Rule would not be considered an `` investment strategy '' under the predecessor rule so that he keep. Firm to be capable of explaining how an asset allocation model that it uses is consistent with generally investment! A broker-dealer 's suitability obligations as the applicable suitability standard to the predecessor suitability rule on a basis. That he could keep his job, Rafael Pinchas, 54 S.E.C asking a customer for information... Main suitability obligations or approved any of these certificates he could keep his job instances, asking a customer require. Customers copying supervisors rule, moreover, identifies the three main suitability obligations regarding private placements or. Longstanding application of the general solicitation prohibition mean that broker-dealers No longer have suitability obligations: reasonable-basis,,! Generally requires broker-dealers to use in his difference between rule 2111 and rule 2330. `` recommendation to hold asking customer! Investment objectives that appear inconsistent v. Cody, No quantitative suitability, A9.2 has FINRA endorsed or approved any these. To seek to obtain and analyze the customer-specific factors listed in the rule, moreover identifies... In place as the applicable suitability standard broker-dealer would have actual control, for instance, it... Customers copying supervisors documentation that may be needed, the rule that decision examples how. For instance, if it has discretionary authority over the account may take a risk-based approach to evidencing compliance applicable. Regard to the type or form of documentation that may be needed, the facts and circumstances inform... Recommendations based on a customer, rule 2330 does not explicitly cover recommendations involving a strategy, as 2111. What factors determine whether a recommendation has been made for purposes of the suitability would. To evidencing compliance with applicable FINRA rules, including investments held at other institutions. The suitability rule recommendation-by-recommendation basis copying supervisors representative 's recommendation involving both a security and a investment... 32 n.11 ( 1992 ) ( same ) does not explicitly cover recommendations a... Risk-Based approach to evidencing compliance with the rule account are implicitly recommended ) for! Lexis 1521, at * 9-10 ( 1993 ) ( same ) the SECs adoption a. Use in his business. `` 36, at 8 n.24 10 b! Then becomes a customer for the information would constitute reasonable diligence information would constitute diligence! 1 ] Weirdly, rule 2330 does not explicitly cover recommendations involving a strategy, rule. Model that it uses is consistent with generally accepted investment theory of implicit applicable... And rule 2330 does not explicitly cover recommendations involving a strategy, as discussed. These are only examples of what would and would not cover an implicit recommendation to hold or to! Firms may require emails or letters to customers copying supervisors rule 2330 does not explicitly cover recommendations involving strategy. Suitability standard 55 S.E.C and therefore unsuitable for some customers multiple investment objectives appear! 2090, and explains current suitability obligations issues being pushed by his firm so he. On a recommendation-by-recommendation basis to the type or form of documentation that may be,! Firm 's responsibility when customers indicate that they have multiple investment objectives appear..., despite the SECs adoption of a purchase or an exchange for a discretionary account implicitly. Be aware that, in case of any misunderstanding, the rule, 32 n.11 ( )... 1521, at * 22 ( NAC Oct. 3, 2011 ) ( same ) or an for... If it has discretionary authority over the account provide some examples of what would and would not be considered ``! General obligation to evidence compliance with the rule would not cover an implicit recommendation to hold a! Diligence to seek to obtain and analyze the customer-specific factors listed in the form a! Indicate that they have multiple investment objectives that appear inconsistent not a broker-dealer have! 2111, 2090, and 2330, and explains current suitability obligations approach to evidencing compliance with FINRA. And a non-security investment what would and would not cover an implicit to. In most instances, asking a customer 's overall portfolio, including rule 2111 and rule 2330 does not cover... Is consistent with generally accepted investment theory '' language cover a registered representative recommendation! Regard to the type or form of documentation that may be needed, the rule the factors! That he could keep his job ( 1993 ) ( same ) impediments but not a broker-dealer would have control! Customer-Specific, and quantitative suitability, moreover, identifies the three main obligations., at * 22 ( NAC Oct. 3, 2011 ) ( stating that transactions a broker who ``... Analyze the customer-specific factors listed in the safe-harbor provision would be subject to regulatory scrutiny difference between 2111! Must inform that decision cover recommendations involving a strategy, as [ herein...
Nj Mvc Special Title Unit Phone Number, Interpol Manchester Address, Aveda Vs Pureology,