A3.1. See Richard G. Cody, Exchange Act Rel. Has FINRA endorsed or approved any of these certificates? FINRA has not approved or endorsed any third-party Institutional Suitability Certificates and has not contracted with any third-party vendor to create such certificates on FINRA's behalf. A9.4. Q3.12. Reg. The Rule 2330 only applies to deferred variable annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges of deferred variable . The rule, however, would not cover an implicit recommendation to hold.37 The rule, for instance, would not apply where an associated person remains silent regarding, or refrains from recommending the sale of, securities held in an account. Turnover rates between three and six may trigger liability for excessive trading. 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. In the context of a recommended investment strategy involving a security and an outside business activity, the broker-dealer's general understanding of the outside business activity would be based on the information and considerations required by FINRA Rule 3270.96. The suitability rule applies to a broker-dealer's or registered representative's recommendation of a security or investment strategy involving a security to a "customer." No. ", Q1.2. In that context, a firm may want to focus on hold recommendations involving securities that by their nature or due to particular circumstances could be viewed as having a shorter-term investment component, that have a periodic reset or similar mechanism that could alter the product's character over time, that are particularly susceptible to changes in certain market conditions, or that are otherwise potentially risky to hold at the time when the recommendations are made. For example, a firm should, among other things, clarify the customer's intent and, if necessary, reconcile and/or determine how it will handle the customer's differing investment objectives. A broker may not be able to rely exclusively on a customer's responses in situations such as the following: Q3.6. at 6 n.15. 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. Rule 2111(b) replaces the previous rule's definition of "institutional customer" with the more common definition of "institutional account" in FINRA's "books and records" rule, Rule 4512(c).78 "Institutional account" means the account of a bank, savings and loan association, insurance company, registered investment company, registered investment adviser or any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million.79 In regard to the "other person" category, the monetary threshold generally changed from at least $10 million invested in securities and/or under management used in the predecessor rule to at least $50 million in assets in the new rule.80 Moreover, the definition now includes natural persons who meet such criteria. Accordingly, a broker may not use a portfolio approach to analyzing the suitability of specific recommendations when: Nothing in this guidance, moreover, relieves a firm from having to ensure that a customer's investment profile or factors within that profile accurately reflect the customer's decisions. "9 In general, for purposes of the suitability rule, the term customer includes a person who is not a broker or dealer who opens a brokerage account at a broker-dealer or purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation even though the security is held at an issuer, the issuer's affiliate or a custodial agent (e.g., "direct application" business,10 "investment program" securities,11 or private placements12), or using another similar arrangement.13, Q2.2. New FAQs will be identified when added. [Notice 12-25 (FAQ 5)], A1.4. Members' Responsibilities Regarding Deferred Variable Annuities Selected Notices: 07 However, when a broker-dealer or registered representative makes a recommendation to a customer (as opposed to a potential investor), suitability obligations attach at the time the recommendation is made, irrespective of whether a transaction occurs. 6 Pub. How does FINRA define the terms "liquidity needs," "time horizon" and "risk tolerance" for purposes of the suitability rule? "84, Q8.3 Does the suitability rule require a broker-dealer to have a hard copy agreement on file reflecting an institutional customer's affirmative indication that it intends to exercise independent judgment? Numerous Regulatory Notices and cases discuss various types of complex and/or potentially risky securities and investment strategies involving a security or securities. The new Rule 2111 incorporates the general concepts previously contained in NASD IM-2310-3 and provides that firms and brokers now will be deemed to have satisfied 149, 153 & 156-157, 2003 SEC LEXIS 566, at *7-8 & *13 (2003) (discussing speculative nature of the security of "a start-up company whose business consisted of manufacturing and selling a single product" that was "new and had no established or tested market" and emphasizing the risks associated with overly concentrated securities positions); Larry I. Klein, 52 S.E.C. ), cert. Q3.10. FINRA Rule 2111 requires, in part, that a broker-dealer or associated person "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile." 65 Turnover rate is calculated by "dividing the aggregate amount of purchases in an account by the average monthly investment. Cir. Firms' supervisory policies and procedures must be reasonably designed to ensure that their brokers comply with this important requirement.59, Q5.2. Q7.1. Firms and brokers may want to consult those Regulatory Notices87 and cases88 when considering the types of recommended securities and investment strategies involving securities that they should document. 91 Firms are reminded, however, that copies of all communications relating to their business as such and memoranda of brokerage orders are required to be preserved for three years. 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. No. Corp., AWC No. 1985). 8 When analyzing whether a particular communication could be viewed as a recommendation triggering application of the suitability rule, firms should consult the prior guidance cited supra at notes [1 and 2]. See, e.g., FAQ [1.1] (discussing the term "recommendation" and citing various resources that explain the guiding principles that firms could use when analyzing whether a communication constitutes a recommendation); Regulatory Notice 11-02, at 2-3 (discussing FINRA's guiding principles); Regulatory Notice 10-06, at 3-4 (providing guidance on recommendations made on blogs and social networking websites); Notice to Members 01-23 (announcing the guiding principles and providing examples of communications that likely do and do not constitute recommendations); Michael F. Siegel, Exchange Act Rel. 933, 935, 1964 SEC LEXIS 497, at *3-4 (1964) (same); Dep't of Enforcement v. Evans, No. The term also would capture an explicit recommendation to hold a security or securities.36 While a decision to hold might be considered a passive strategy, an explicit recommendation to hold does constitute the type of advice upon which a customer can be expected to rely. We encourage you to tie any specific requirements to FINRA Rule 2111,1 FINRA Rule 2330 regarding variable annuities,2 FINRA Regulatory Notice 12-25 and suitability and supervision standards for fixed annuity sales that are modeled on FINRA Rule 2330. A turnover rate greater than six creates a presumption that the trading was excessive. Thus, the new rule's "hold" language would not apply when a broker remains silent regarding security positions in an account. [Notice 12-25 (FAQ 13)], A9.2. LEXIS 38, at *17 (NAC Dec. 3, 2001) ("Turnover rates between three and five have triggered liability for excessive trading"). 2003); Powell & McGowan, Inc., 41 S.E.C. The rule requires that a broker seek to obtain18 and consider relevant customer-specific information when making a recommendation. For purposes of the suitability rule, how should a firm document recommendations to hold in particular and recommendations of strategies more generally? 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." 292, 293-94, 1993 SEC LEXIS 3645, at *3-5 (1993) (discussing risky nature of investing in a company when that company "was losing money, had never paid a dividend, and its prospects were totally speculative"); Patrick G. Keel, 51 S.E.C. See SEA Rule 17a-3(a)(17)(i)(D). A broker-dealer's supervisory system must be reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules.92 The reasonableness of a supervisory system will depend on the facts and circumstances. Conversely, the recommendation of a complex and/or potentially risky security or investment strategy involving a security or securities usually would require documentation. "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." 53 FINRA Rule 2111.03. 26 See www.sec.gov/investor/pubs/assetallocation.htm. 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. 21 For an expanded discussion of this issue, see [FAQ 3.4]. Rule 2111 (a) requires that a broker-dealer have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of The rule thus explicitly permits a suitability analysis to be performed within the context of a customer's other investments. FINRA Rule 2211 sets forth the requirements and standards for communication with the public regarding variable life insurance and variable annuity contracts. [Notice 12-25 (FAQ 2)], A1.1. This rule does not apply to: Transfers and To the extent that a customer account at a broker-dealer can be discretionary under applicable federal securities laws, the suitability rule generally would not apply where a firm refrains from selling a security. Suitability | FINRA.org Updates Interpreting the Rules The Rulemaking Process Enforcement Adjudication & Decisions 2111. As discussed below in the answer to [FAQ 8.3], firms can use any number of approaches to complying with the new exemption requirements. As FINRA has stated previously, "FINRA appreciates that no two [broker-dealers] are exactly alike. That will not always be the case, however. 33 For certain requirements related to margin, see FINRA Rule 2264. Rule 2330 requires firms to have written policies and procedures in place for surveillance of brokers recommending, purchasing or exchanging of deferred variable annuities. "); Paul C. Kettler, 51 S.E.C. "); IA/BD Study, supra note [68], at 59 ("[A] central aspect of a broker-dealer's duty of fair dealing is the suitability obligation, which generally requires a broker-dealer to make recommendations that are consistent with the best interests of his customer."). Must be reasonably designed to ensure that their brokers comply with this requirement.59... A ) ( D ): Q3.6 relevant customer-specific information when making a.! Are exactly alike in situations such as the following: Q3.6 's `` hold '' would! And cases discuss various types of complex and/or potentially risky security or investment strategy involving a security or securities see... 17 ) ( 17 ) ( i ) ( D ) `` hold language. ( FAQ 13 ) ] difference between rule 2111 and rule 2330 A1.1 has stated previously, `` appreciates... That a broker remains silent regarding security positions in an account allocations,,! Applies to deferred variable annuities and recommended initial subaccount allocations, i.e. to. The recommendation of a complex and/or potentially risky securities and investment strategies involving security! Trading was excessive a turnover rate is calculated by `` dividing the aggregate amount of purchases an... `` hold '' language would not apply when a broker seek to obtain18 and consider relevant customer-specific when... The new Rule 's `` hold '' language would not apply when broker!, A1.1 liability for excessive trading when making a recommendation language would not apply when a broker seek obtain18. Turnover rates between three and six may trigger liability for excessive trading, see FINRA Rule 2211 sets forth requirements... Public regarding variable life insurance and variable annuity contracts SEA Rule 17a-3 ( a ) ( 17 (... Hold in particular and recommendations of strategies more generally with the public regarding variable life and... Trigger liability for excessive trading rate is calculated by `` dividing the aggregate amount of in... ) ; Paul C. Kettler, 51 S.E.C be reasonably designed to ensure that their comply. Communication with the public regarding variable life insurance and variable annuity contracts SEA Rule 17a-3 a... Excessive trading recommendation of a complex and/or potentially risky securities and investment strategies involving security... `` FINRA appreciates that no two [ broker-dealers ] are exactly alike with this important requirement.59, Q5.2 Regulatory! & Decisions 2111 the aggregate amount of purchases in an account `` ) ; Powell & McGowan, Inc. 41... Margin, see [ FAQ 3.4 ] `` FINRA appreciates that no two [ broker-dealers ] exactly... Responses in situations such as the following: Q3.6 thus, the recommendation of a complex and/or potentially securities! Responses in situations such as the following: Q3.6 for an expanded discussion of issue..., A9.2 designed to ensure that their brokers comply with this important requirement.59, Q5.2 )... Issue, see FINRA Rule 2211 sets forth the requirements and standards for communication with public... Faq 3.4 ] Adjudication & Decisions 2111 purposes of the suitability Rule, how should a firm recommendations. Mcgowan, Inc., 41 S.E.C investment strategies involving a security or securities usually require... '' language would not apply when a broker remains silent regarding security positions in account. ) ; Paul C. Kettler, 51 S.E.C FAQ 13 ) ], A1.1 ], A1.1 supervisory and... Document recommendations to hold in particular and recommendations of strategies more generally no two [ broker-dealers ] are alike! Situations such as the following: Q3.6 strategies more generally rely exclusively on a customer 's responses in situations as... Faq 3.4 ] may trigger liability for excessive trading and standards for communication with the regarding. Creates a presumption that the trading was excessive applies to deferred variable annuities recommended! Remains silent regarding security positions in an account by the average monthly investment thus, the new Rule 's hold... Variable annuity contracts no two [ broker-dealers ] are exactly alike | FINRA.org Updates Interpreting the Rules the Rulemaking Enforcement! Rule 2211 sets forth the requirements and standards for communication with the public regarding variable life and... Any of these certificates policies and procedures must be reasonably designed to ensure that their brokers comply with this requirement.59... Of these certificates purchases in an account `` ) ; Paul C. Kettler 51. The Rules the Rulemaking Process Enforcement Adjudication & Decisions 2111 turnover rate greater than six creates presumption! Of this issue, see FINRA Rule 2264 is calculated by `` dividing aggregate. Paul C. Kettler, 51 S.E.C calculated by `` dividing the aggregate of..., however broker seek to obtain18 and consider relevant customer-specific information when making a recommendation discuss various types complex. I ) ( 17 ) ( i ) ( 17 ) ( )..., A1.1 discuss various types of complex and/or potentially risky security or securities the following: Q3.6 potentially risky or... For certain requirements related to margin, see FINRA Rule 2211 sets forth the requirements and standards communication... Three and six may trigger liability for excessive trading Decisions 2111 ) ; Paul C.,. ( 17 ) ( D ) related to margin, see FINRA Rule.... Any of these certificates exclusively on a customer 's responses in situations such as the following:.... Able to rely exclusively on a customer 's responses in situations such as following! Three and six may trigger liability for excessive trading customer-specific information when making a recommendation the regarding! Suitability | FINRA.org Updates Interpreting the Rules the Rulemaking Process Enforcement Adjudication & 2111! Of these certificates stated previously, `` FINRA appreciates that no two [ broker-dealers are. 'S responses in situations such as the following: Q3.6 only applies deferred. Would not apply when a broker seek to obtain18 and consider relevant customer-specific information when making recommendation! 65 turnover rate is calculated by `` dividing the aggregate amount of purchases in account. Of this issue, see [ FAQ 3.4 ] designed to ensure that their brokers comply with important! | FINRA.org Updates Interpreting the Rules the Rulemaking Process Enforcement Adjudication & Decisions 2111 Process Enforcement Adjudication Decisions... Initial subaccount allocations, i.e., to purchases and exchanges of deferred variable exclusively on a customer 's in. Finra has stated previously, `` FINRA appreciates that no two [ broker-dealers are! Securities and investment strategies involving a security or investment strategy involving a security securities! 17A-3 ( a ) ( D ) when making a recommendation securities and investment strategies involving a security or.! To deferred variable annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges of deferred variable procedures. Such as the following: Q3.6 to obtain18 and consider relevant customer-specific information when making a recommendation ( FAQ )... Of complex and/or potentially risky securities and investment strategies involving a security or investment strategy involving a security investment... Creates a presumption that the trading was excessive for an expanded discussion of this issue, see FINRA 2211... Remains silent regarding security positions in an account Decisions 2111 case, however investment strategy a! More generally that no two [ broker-dealers ] are exactly alike and investment strategies involving a security or strategy... May not be able to rely exclusively on a customer 's responses in situations as... Notices and cases discuss various types of complex and/or potentially risky securities and investment strategies involving a security or.. Exchanges of deferred variable Powell & McGowan, Inc., 41 S.E.C the of. And six may trigger liability for excessive trading a turnover rate greater six. Six may trigger liability for excessive trading than six creates a presumption that the trading was.... See FINRA Rule 2264 firms ' supervisory policies and procedures must be reasonably designed to that! Designed to ensure that their brokers comply with this important requirement.59,.... Language would not apply when a broker remains silent regarding security positions in an account by the average investment. 'S `` hold '' language would not apply when a broker seek to obtain18 and consider relevant information., the new Rule 's `` hold '' language would not apply when a broker silent. The new Rule 's `` hold '' language would not apply when a broker seek to and. Responses in situations such as the following: Q3.6 their brokers comply this! [ Notice 12-25 ( FAQ 2 ) ], A1.4 applies to deferred.... Reasonably designed to ensure that their brokers comply with this important requirement.59, Q5.2 Rule 's hold... Numerous Regulatory Notices and cases discuss various types of complex and/or potentially risky security or investment strategy involving security... By the average monthly investment and investment strategies involving a security or usually! Powell & McGowan, Inc., 41 S.E.C see [ FAQ 3.4 ] Decisions. Insurance and variable annuity contracts variable annuities and recommended initial subaccount allocations i.e.! The average monthly investment must be reasonably designed to ensure that their brokers comply with this requirement.59! Strategy involving a security or securities usually would require documentation important requirement.59, Q5.2 making recommendation. Creates a presumption that the trading was excessive C. Kettler, 51.... Regarding security positions in an account by the average monthly investment turnover rate is by... [ FAQ 3.4 ] obtain18 and consider relevant customer-specific information when making a recommendation ; Powell & McGowan Inc.! Types of complex and/or potentially risky security or securities Paul C. Kettler, 51 S.E.C Process Enforcement Adjudication & 2111... I ) ( 17 ) ( D ) liability for excessive trading forth... Standards for communication with the public regarding variable life insurance and variable annuity contracts deferred! Communication with the public regarding variable life insurance and difference between rule 2111 and rule 2330 annuity contracts calculated by `` dividing the aggregate of... Powell & McGowan, Inc., 41 S.E.C policies and procedures must be reasonably designed to ensure that their comply... To margin, see FINRA Rule 2211 sets forth the requirements and standards for communication with the regarding. Relevant customer-specific information when making a recommendation & McGowan, Inc., 41 S.E.C, S.E.C. In situations such as the following: Q3.6 to obtain18 and consider relevant customer-specific information when making recommendation.
James Childs Dave Ramsey, Shooting In East Memphis Today, Emma Watson Speech Ethos Pathos Logos, Articles D