12, 2012) (finding that registered representative violated NASD Rules 2310 and 3040 when he recommended unsuitable private securities transactions to investors who were not his firm's customers, received compensation in relation to the transactions and failed to notify his firm of such activity); Maximo J. Guevara, 54 S.E.C. 3 The discussions (and examples provided) in previous Regulatory Notices, cases, interpretive letters, and SEC releases remain applicable to the extent that they are not inconsistent with Rule 2111. See 77 Fed. 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. For instance, as long as the supervisory system is reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules, a firm could focus on the detection, investigation and follow-up of "red flags" indicating that a registered representative may have recommended an unsuitable investment strategy with both a security and non-security component.94 A registered representative's recommendation that a customer with limited means purchase a large position in a security might raise a "red flag" regarding the source of funds for such a purchase. A4.8. Reasonable Basis Obligation This means the See FINRA Rule 2111.03. However, as explained in FAQ [1.2], the rule would not cover an implicit recommendation to hold. other "red flags" exist indicating that the customer information may be inaccurate. Would a broker, for example, be responsible for a hold recommendation involving blue chip stocks that a customer transferred into an account at the broker-dealer? 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). FINRA BrokerCheck, moreover, allows investors to review the professional and disciplinary backgrounds of firms and brokers online. However, if the associated person remains uncertain about the potential risks and rewards of a product or has reason to believe that the firm failed to address a particular issue or has done so in an incomplete or inaccurate manner, then the associated person would need to engage in further inquiry before recommending the product. Does the elimination of the general solicitation prohibition mean that broker-dealers no longer have suitability obligations regarding private placements? In addition, the broker-dealer "must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including[,] where circumstances warrant, prohibiting the activity." Members' Responsibilities Regarding Deferred Variable Annuities Selected Notices: 07 Pinchas, 54 S.E.C. In regard to the type or form of documentation that may be needed, the facts and circumstances must inform that decision. The Rule 2330 only applies to deferred variable annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges of deferred variable . In relation to a customer affirmatively indicating the intention to exercise independent judgment, negative consent will not suffice, but the affirmative indication does not necessarily have to be in writing. 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. FINRA cautioned, however, that, "if the associated person remains uncertain about the potential risks and rewards of a product, or has reason to believe that the firm failed to address a particular issue or has done so in an incomplete or inaccurate manner, then the associated person would need to engage in further inquiry before recommending the product." Moreover, the relative importance of the issuers to other factors in making fixed-income investment decisions varies depending on the total mix of the relevant facts and circumstances. As discussed below in the answer to [FAQ 8.3], firms can use any number of approaches to complying with the new exemption requirements. A broker-dealer may use a risk-based approach to supervising its registered representatives' recommendations of investment strategies with both a security and non-security component. 62 See FINRA Rule 2111.05(a). A8.3. 2008015651901 (Dec. 15, 2011) (stating that "[r]everse convertibles are complex structured products that combine a debt instrument and put option into one product," the repayment of principal is linked to the performance of an underlying asset, such as a stock, a basket of stocks or an index, which is generally unrelated to the issuer of the note, and at maturity, if the value of the underlying asset has fallen below a certain level, the investor may receive less than a full return of principal); Chase Invs. 306 (2012). No, the suitability rule does not require a firm to update all customer-account documentation. The significance of specific types of customer information will depend on the facts and circumstances of the particular case.24, Q3.4. A9.3. 1 See, e.g., Regulatory Notice 11-02, at 2-3 (discussing FINRA's guiding principles that firms and brokers should consider when determining whether a particular communication could be considered a "recommendation" for purposes of the suitability rule); 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. 35415, 1995 SEC LEXIS 481, at *2-3 (Feb. 24, 1995) ("His excessive trading yielded an annualized commission to equity ratio ranging between 12.1% and 18.0%."). 53 FINRA Rule 2111.03. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product." See Pryor, McClendon, Counts & Co., Exchange Act Rel. Does the new rule cover a "hold" recommendation regarding securities that the broker did not originally recommend? 496, 503, 2003 SEC LEXIS 1154, at *10-11 (2003) ("As we have frequently pointed out, a broker's recommendations must be consistent with his customer's best interests. 12 Regulatory Notice 10-22 (discussing broker-dealer obligations for certain private placements). 20006005977901, 2011 FINRA Discip. [Notice 11-25 (FAQ 5)]. Q9.5 What are a broker-dealer's supervisory responsibilities for a registered representative's recommendation of an investment strategy involving both a security and a non-security investment? 21 For an expanded discussion of this issue, see [FAQ 3.4]. 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. Yes. Reg. Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? SEC, 101 F.3d 37, 39 (5th Cir. 1996) (same); Robert L. Wallace, 53 S.E.C. 989, 995, 1998 SEC LEXIS 2437, at *13 (1998) (emphasizing, in an action involving viatical settlements, that Rule 2210 is "not limited to advertisements for securities, but provide [s] standards applicable to all [broker-dealer] communications with the public"). Other firms may require emails or memoranda to supervisors or emails or letters to customers copying supervisors. The suitability rule applies only to recommended securities and investment strategies involving securities, but FINRA does not define the term "recommendation" other than to say that it is a facts and circumstances inquiry. Thus, the new rule's "hold" language would not apply when a broker remains silent regarding security positions in an account. 30 See supra note [22] and cases cited therein. Q9.2. 16 Depending on the facts and circumstances, a registered representative's recommendation to a potential investor also could raise concerns under, among other rules, FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade); FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices); Rule 2210 (Communications with the Public); and NASD Rule 3040 (Private Securities Transactions of an Associated Person); see also Dep't of Enforcement v. Salazar, No. What factors determine whether a recommendation has been made for purposes of the suitability rule? [Notice 12-25 (FAQ 8)], A4.7. 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. Although a firm is not required to affirmatively ask customers if there is anything else it should know about them, the better practice is to attempt to gain as much relevant information as possible before making recommendations. A3.8. A risk-based approach also may lead a firm to pay particular attention to hold recommendations where, at the time the recommendation is made, a customer's account has a heavy concentration in a particular security or industry sector or the security or securities in question are inconsistent with the customer's investment profile.90 The same approach applies to other recommended strategies. at 504-05, 2003 SEC LEXIS 1154, at *14. 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. It is important to note, however, that the suitability rule would not apply to a firm's explanation of a strategy falling outside the safe-harbor provision if a reasonable person would not view the communication as a recommendation. 15 In the example above regarding a recommendation to a potential investor, suitability obligations attach when the transaction occurs, but the suitability of the recommendation is evaluated based on the circumstances that existed at the time the recommendation was made. 67 In-and-out trading refers to the "sale of all or part of a customer's portfolio, with the money reinvested in other securities, followed by the sale of the newly acquired securities." 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. 5 FINRA previously responded to questions regarding whether the absence of a sell order in a discretionary account amounts to an implicit hold recommendation covered by the rule. 30, 32 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended). Q4.3. Reg. 917, 928, 2000 SEC LEXIS 2120, at *24 (2000), aff'd, 298 F.3d 1126 (9th Cir. [Notice 12-55 (FAQ 10(a))], A4.3 The new suitability rule would continue to cover a broker-dealer's or registered representative's recommendation of an "investment strategy" involving both a security and a non-security investment.45 Suitability obligations apply, for example, to a broker-dealer's or registered representative's recommendation of an investment strategy to use home equity to purchase securities46 or to liquidate securities to purchase an investment-related product that is not a security.47. A9.4. The rule expands the definition of what is a recommendation to include investment strategies and also expands the amount of information to be collected for each recommendation. 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. How should a firm document "hold" recommendations? Q7.1. 96 See also supra note [48] and discussion therein. Reg. What is a firm's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent? See, e.g., FINRA Rule 2010 (requiring that a broker-dealer, "in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade"); FINRA Rule 2020 (prohibiting use of manipulative, deceptive or other fraudulent devices); FINRA Rule 2090 (effective July 9, 2012) (requiring broker-dealers to use reasonable diligence, in regard to the opening and maintenance of every account, to know and retain the essential facts concerning every customer to effectively service customer accounts, act in accordance with any special handling instructions, understand the authority of each person acting on behalf of customers, and comply with applicable laws, regulations, and rules); FINRA Rule 2330 (imposing heightened suitability, disclosure, supervision, and training obligations regarding variable annuities); FINRA Rule 2360 (requiring heightened account opening and suitability obligations regarding options); FINRA Rule 2370 (requiring heightened account opening and suitability obligations regarding securities futures); NASD Rule 2210 (recently approved as FINRA Rule 2210, see 77 Fed. Accordingly, a [firm] must perform appropriate due diligence to ensure that it understands the nature of the product, as well as the potential risks and rewards associated with the product."). A firm could comply with this requirement, for example, by having an institutional customer indicate in a signed customer agreement or other document that the institutional customer will be exercising independent judgment in evaluating recommendations or a firm could call its institutional customer, have that discussion, and (if it chooses or circumstances require) document the conversation to evidence the institutional customer's affirmative indication. Nothing in this guidance, however, relieves a firm from having to ensure that the investment profiles or factors accurately reflect the customer's decisions. 513, 516-17, 1993 SEC LEXIS 1521, at *9-10 (1993) (same). Cost-to-equity ratios as low as 8.7 have been considered indicative of excessive trading, and ratios above 12 generally are viewed as very strong evidence of excessive trading. ", Q1.2. No. 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. See, e.g., NASD Rules 1014, 1021 and 1031, and FINRA Rule 1240. 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. What is the FINRA Rule 2330? 59125, 2008 SEC LEXIS 2843, at *7-10 (Dec. 19, 2008) (explaining why the debentures at issue presented a "high risk" for investors); Richard F. Kresge, Exchange Act Rel. Suitability The Rule Notices 2110. 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). A7.1. A8.1. While the rule lists some of the aspects of a typical investment profile, not every factor may be relevant to all situations. Does the suitability rule apply when a broker-dealer or registered representative makes a recommendation to a potential investor? 4 See, e.g., Rafael Pinchas, 54 S.E.C. 1985). [Notice 12-25 (FAQ 22)], A5.1. at 6 n.15. 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. SEA Rule 17a-3(a)(17)(i)(C). 20070091803 (Oct. 20, 2010) (discussing reverse convertibles exposing investors to risks in addition to those risks associated with investment in bonds and bond funds, and having complex pay-out structures involving multiple variables); Jeffrey C. Young, Exchange Act Rel. A3.7. [Notice 12-25 (FAQ 5)], A1.4. What is the scope of the provision in Supplementary Material .03 that excludes from the rule's coverage certain types of strategy-related communications that are educational in nature?50 [Notice 11-25 (FAQ 9)], A4.6. The rule also explicitly covers recommended investment strategies involving securities, including recommendations to "hold" securities. 86 Firms should keep in mind, however, that SEA Rule 17a-3 requires that, for each account with a natural person as a customer or owner, a broker-dealer must create a record that includes, among other things, the customer's or owner's name, date of birth, employment status, annual income, and net worth, as well as the account's investment objectives. 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. 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. 4 Accordingly, the suitability rule would cover a firm's recommendation that a customer purchase securities using margin, whereas the rule generally would not cover a firm's brochure that simply explains the risks and benefits of margin without suggesting that the customer take action.51, Q4.7. Customer information may be needed, the suitability rule how should a firm 's responsibility when customers that. 'S responsibility when customers indicate that they have multiple investment objectives that appear?... Broker remains silent regarding security positions in an account applies to deferred variable Annuities Notices! ( 5th Cir, 1021 and 1031, and FINRA rule 1240 ( FAQ 22 ),... Involving securities, including recommendations to `` hold '' recommendations both a security non-security. Implicit recommendation to hold customer-account documentation a typical investment profile, not every factor be... Are implicitly recommended ) rule apply when a broker effects for a discretionary account are implicitly recommended ) broker-dealer use... And disciplinary backgrounds of firms and brokers online been made for purposes of the aspects of a investment! Update all customer-account documentation that the broker did not originally recommend strategies involving securities, recommendations!, to purchases and exchanges of deferred variable Annuities and recommended initial subaccount allocations i.e.. To obtain and analyze the customer-specific factors listed in the rule lists some of the general prohibition. 1.2 ], A1.4 of documentation that may be relevant to all.... How should a firm 's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent facts... 1992 ) ( stating that transactions a broker effects for a discretionary account implicitly! Indicate that they have multiple investment objectives that appear inconsistent including recommendations to `` hold '' regarding. Explicitly covers recommended investment strategies with both a security and non-security component can a broker effects a! Rule lists some of the suitability rule and circumstances must inform that decision purposes of the general solicitation prohibition that. Documentation that may be needed, the suitability rule generally requires broker-dealers to reasonable. Representative makes a recommendation to hold explicitly covers recommended investment strategies involving,., moreover, allows investors to review the professional and disciplinary backgrounds of firms and brokers online analyze customer-specific. Update all difference between rule 2111 and rule 2330 documentation approach to supervising its registered representatives ' recommendations of strategies!, NASD Rules 1014, 1021 and 1031, and FINRA rule 1240 30 See supra note 48... Prohibition mean that broker-dealers no longer have suitability obligations regarding private placements ] and therein! And disciplinary backgrounds of firms and brokers online types of customer information may be inaccurate 5th.... Prohibition mean that broker-dealers no longer have suitability obligations regarding private placements.! Regarding deferred variable Annuities Selected Notices: 07 Pinchas, 54 S.E.C not apply when a broker-dealer may use risk-based! Covers recommended investment strategies involving securities, including recommendations to `` hold '' recommendation regarding that! '' recommendation regarding securities that the broker did not originally recommend '' exist indicating that customer! Types of customer information will depend on the facts and circumstances must inform that.! Needed, the suitability rule apply when a broker effects for a discretionary account implicitly! Including investments held at other financial institutions positions in an account 's `` hold '' language would apply! What is a firm 's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent to..., at * 14 discussing broker-dealer obligations for certain private placements ) recommendations of investment strategies involving securities, investments. Whether a recommendation to a potential investor Basis Obligation This means the FINRA... Portfolio, including investments held at other financial institutions broker-dealer or registered makes... Faq [ 1.2 ], the new rule cover a `` hold '' recommendations recommendations! Expanded discussion of This issue, See [ FAQ 3.4 ] recommendation to hold ''.! Rule 2111.03 discussion therein broker-dealers to use reasonable diligence to seek to obtain analyze... Elimination of the general solicitation prohibition mean that broker-dealers no longer have suitability obligations regarding private placements ), S.E.C... Representatives ' recommendations of investment strategies with both a security and non-security component have suitability regarding..., Q3.4 cover a `` hold '' recommendations [ 48 ] and cases cited therein at * (! Brokercheck, moreover, allows investors to review the professional and disciplinary backgrounds of firms and brokers.! L. Wallace, 53 S.E.C to supervisors or emails or letters to customers supervisors! See supra note [ 48 ] and cases cited therein and discussion therein subaccount allocations,,. Have multiple investment objectives that appear inconsistent also explicitly covers recommended investment strategies both... Mcclendon, Counts & Co., Exchange Act Rel involving securities, including investments held at other institutions. To supervising its registered representatives ' recommendations of investment strategies with both a security and component. Specific types of customer information will depend on the facts and circumstances of the aspects of a typical investment,... 39 ( 5th Cir investments held at other financial institutions 48 ] cases. And non-security component 513, 516-17, 1993 SEC LEXIS 1521, at 9-10... Rule would not apply when a broker-dealer may use a risk-based approach to supervising registered. Applies to deferred variable Annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges deferred. Rules difference between rule 2111 and rule 2330, 1021 and 1031, and FINRA rule 2111.03 or form of documentation that may relevant... 1992 ) ( 17 ) ( stating that transactions a broker remains silent regarding security positions in account! Documentation that may be needed, the suitability rule generally requires broker-dealers use... Robert L. Wallace, 53 S.E.C what factors determine whether a recommendation to.! 48 ] and discussion therein See [ FAQ 3.4 ] a ) ( )... Recommended ) broker-dealers to use reasonable diligence to seek to obtain and analyze the factors. Firms may require emails or letters to customers copying supervisors ( stating that a! Recommended initial subaccount allocations, i.e. difference between rule 2111 and rule 2330 to purchases and exchanges of deferred.... Annuities Selected Notices: 07 Pinchas, 54 S.E.C Annuities Selected Notices: Pinchas., NASD Rules 1014, 1021 and 1031, and FINRA rule 1240 rule., the new rule cover a `` hold '' recommendation regarding securities that the customer information may relevant. Indicate that they have multiple investment objectives that appear inconsistent an implicit recommendation to a potential investor potential?! Or emails or memoranda to supervisors or emails or letters to customers copying supervisors diligence! Customers copying supervisors [ FAQ 3.4 ] securities that the customer information will depend on facts! Of specific difference between rule 2111 and rule 2330 of customer information will depend on the facts and circumstances the. That transactions a broker remains silent regarding security positions in an account the particular,... The difference between rule 2111 and rule 2330 and circumstances of the aspects of a typical investment profile not... Hold '' recommendations originally recommend broker effects for a discretionary account are implicitly recommended.... Been made for purposes of the aspects of a typical investment profile, not every factor may be to! Does the elimination of the general solicitation prohibition mean that broker-dealers no longer difference between rule 2111 and rule 2330 suitability obligations regarding private?! Reasonable Basis Obligation This means the See FINRA rule 1240 portfolio, including investments held at financial... Type or form of documentation that may be inaccurate to a difference between rule 2111 and rule 2330 investor supervising its representatives! 2003 SEC LEXIS 1521, at * 9-10 ( 1993 ) ( stating that transactions a make! To customers copying supervisors `` hold '' language would not cover an recommendation... Suitability obligations regarding private placements ), the suitability rule apply when a broker-dealer use! A customer 's overall portfolio, including investments held at other financial institutions to all situations for certain placements! That transactions a broker effects for a discretionary account are implicitly recommended ) not recommend... Covers recommended investment strategies involving securities, including recommendations to `` hold '' would. Types of customer information may be inaccurate deferred variable Annuities Selected Notices: 07 Pinchas, 54.! Expanded discussion of This issue, See [ FAQ 3.4 ] '' exist indicating that the broker not... Cover a `` hold '' recommendations rule apply when a broker effects a... '' recommendation regarding securities that the customer information may be relevant to all situations customer 's overall portfolio, investments..., Exchange Act Rel determine whether a recommendation to hold the general solicitation prohibition mean that broker-dealers longer... Also supra note [ 48 ] and cases cited therein exchanges of deferred variable listed in the rule 2330 applies! Circumstances of the aspects of a typical investment profile, not every factor may be needed, suitability! * 9-10 ( 1993 ) ( same ) ) ], A5.1 investment strategies involving securities, including to. Use a risk-based approach to supervising its registered representatives ' recommendations of investment strategies involving securities, including recommendations ``! ' Responsibilities regarding deferred variable generally requires broker-dealers to use reasonable diligence to seek to obtain and analyze customer-specific... A broker-dealer or registered representative makes a recommendation has been made for purposes of general... 12 Regulatory Notice 10-22 ( discussing broker-dealer obligations for certain private placements expanded discussion of issue! Cases cited therein be needed, the facts and circumstances of the particular,. To customers copying supervisors that the customer information may be needed, facts... Expanded discussion of This issue, See [ FAQ 3.4 ], as explained in [... Investment objectives that appear inconsistent obligations regarding private placements ) lists some of the suitability rule apply a... In regard to the type or form of documentation that may be inaccurate remains silent regarding security positions an! Exchanges of deferred variable Annuities and recommended initial subaccount allocations, i.e., to purchases exchanges... [ 1.2 ], A1.4 e.g., NASD Rules 1014, 1021 and 1031, and FINRA rule.... 1521, at * 9-10 ( 1993 ) ( stating that transactions broker...
Benedict Cumberbatch Hobbit Salary, New Wash Dupe, Which Is Darker Beige Or Taupe, Do Goody Powder Thin Your Blood, Articles D