4, 2012). 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 Would a recommendation to maintain an asset mix that was based on an asset allocation model that meets the criteria described in the rule fall within the safe-harbor provision in Rule 2111.03? [Notice 11-25 (FAQ 7)]. Recently FINRA Rule 2111 went into effect regarding Suitability. 2008)]; see also Scott Epstein, Exchange Act Rel. If a firm's call center informs customers that they are permitted to continue to maintain their investments at the firm under such circumstances, would FINRA consider those communications to be "hold" recommendations triggering application of the new suitability rule? 513, 516-17, 1993 SEC LEXIS 1521, at *9-10 (1993) (same). "); Daniel R. Howard, 55 S.E.C. The rule states that certain communications "are excluded from the coverage of Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities[. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product." Suitability The Rule Notices 2110. This document consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic. Any significant variation from the list in the safe-harbor provision would be subject to regulatory scrutiny. [Notice 12-25 (FAQ 19)]. The rule generally requires a broker-dealer to seek to obtain and analyze the customer-specific factors listed in the rule when making a recommendation to a customer. May 20, 1999) (holding that FINRA's requirement that registered representatives act in a manner consistent with just and equitable principles of trade applies to all unethical business conduct, regardless of whether the conduct involves securities); Vail v. SEC, 101 F.3d 37, 39 (5th Cir. "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. FINRA stated that "[a] firm should educate its associated persons on the potential risks and rewards of the products that the firm permits them to recommend. That is, even if a firm's product committee has approved a product for sale, an individual broker's lack of understanding of a recommended product or strategy could violate the obligation, notwithstanding that the recommendation is suitable for some investors.62. 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. 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. 1096, 1100, 2002 SEC LEXIS 1909, at *5-6 (2002) (same), aff'd, 77 F. App'x 2 (1st Cir. 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. Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? 108, 117, 2003 SEC LEXIS 338, at *15 (2003) (focusing, in part, on risks of using margin); James B. Id. "68 What does it mean to act in a customer's best interests? The account record requirements in paragraph (a)(17)(i)(A) of the Rule apply only to accounts for which the broker or dealer is, or within the past 36 months has been, required to make a suitability determination. In addition, for other FINRA rules that have suitability components such as FINRA Rule 2330 (Members Responsibilities regarding Deferred Variable Annuities) and FINRA Rule 2360 If a customer chooses multiple investment objectives that appear inconsistent, a firm must conduct appropriate supervision and meaningful suitability determinations, as applicable, in light of such differences. Thus, the new rule's "hold" language would not apply when a broker remains silent regarding security positions in an account. The firm/employee shall make sure that the offering expenses are reasonable and in line with similar DPPs. Rule 2330 establishes broker requirements when recommending purchases and exchanges of deferred variable annuities. The issuers' identities and creditworthiness are important information in determining whether to purchase a debt security, but there may be other factors that affect the pricing and any decision to invest in specific debt securities. A firm's analysis of whether the identification of a more limited universe of fixed-income securities constitutes a recommendation of particular securities may, depending on the facts and circumstances, differ from its assessment regarding equity securities. Once a broker-dealer identifies a recommended investment strategy involving both a security and a non-security investment, the broker-dealer's suitability obligations apply to the security component of the recommended strategy95 but its suitability analysis also must be informed by a general understanding of the non-security component of the recommended investment strategy. 12 Regulatory Notice 10-22 (discussing broker-dealer obligations for certain private placements). FINRA cautioned, however, that a firm should evidence a customer's intent to use different investment profiles or factors for the different accounts. Id. 59 FINRA[, in FAQ 5.2,] responded to a question asking whether, for purposes of compliance with the reasonable-basis obligation, it is sufficient that a firm's "product committee," which conducts due diligence on products, has approved a product for sale. A broker can violate reasonable-basis suitability under either prong of the test. Finally, the rule provides a modified institutional-customer exemption. A4.1. Where the hold recommendation involves an overly concentrated position in a security, however, documentation usually would be necessary, even if the broker did not originally recommend the purchase of the security. Q3.7. However, where a broker-dealer's or registered representative's recommendation does not refer to a security or securities, the suitability rule is not applicable. Reasonable-basis suitability has two main components: a broker must (1) perform reasonable diligence to understand the potential risks and rewards associated with a recommended security or strategy and (2) determine whether the recommendation is suitable for at least some investors based on that understanding. 42 The rule would apply, for instance, to a registered representative's recommendation to a customer to purchase shares of high dividend companies even though the registered representative does not mention a particular high dividend company. See [FAQ 4.1], Regulatory Notice 11-02, at 3. Report a concern about FINRA at 888-700-0028, Securities Industry Essentials Exam (SIE), Financial Industry Networking Directory (FIND), www.sec.gov/investor/pubs/assetallocation.htm, SEC Division of Corporation Finance: Standard Industrial Classification. 1304, 1311, 1997 SEC LEXIS 762, at *19 (1997). A hold recommendation involving shares of a blue chip stock ordinarily would not present the type of risk, absent unusual facts, that would require a detailed analysis or documentation. No. 26 See www.sec.gov/investor/pubs/assetallocation.htm. It also is important to note that, where an institutional customer has delegated decisionmaking authority to an agent, such as an investment adviser or a bank trust department, Rule 2111(b) makes clear that the factors relevant to determining whether the customer meets the criteria for the institutional-customer exemption will be applied to the agent. 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 Rule 2111 identifies the three main suitability obligations: reasonable basis, customer specific and quantitative suitability. at 339-40 n.14, 1999 SEC LEXIS 1754, at *17 n.14. [Notice 12-55 (FAQ 7)]. Does a firm have to update all customer-account documentation by the suitability rule's implementation date to capture the new "customer investment profile" factors (age, investment experience, time horizon, liquidity needs and risk tolerance) that were added to the existing list (other holdings, financial situation and needs, tax status and investment objectives)?17 [Notice 11-25 (FAQ 2)]. Similarly, a registered representative's recommendation that a "buy and hold" customer with an investment objective of income liquidate large positions in blue chip stocks paying regular dividends might raise a "red flag" regarding whether that recommendation is part of a broader investment strategy. LEXIS 22 (Mar. As discussed above, aside from the instances when a firm determines not to seek certain information (addressed in [FAQ 3.4]), FINRA Rule 2111 does not impose explicit documentation requirements. A3.1. In addition to the definitional change, the new institutional-customer exemption focuses on two factors: (1) whether a broker "has a reasonable basis to believe the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities" (a factor used in the predecessor rule), and (2) whether "the institutional customer affirmatively indicates that it is exercising independent judgment" (a new requirement).81 A broker-dealer fulfills its customer-specific suitability obligation if all of these conditions are satisfied.82. A8.1. 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. "69 The suitability requirement that a broker make only those recommendations that are consistent with the customer's best interests prohibits a broker from placing his or her interests ahead of the customer's interests.70 Examples of instances where FINRA and the SEC have found brokers in violation of the suitability rule by placing their interests ahead of customers' interests include the following: The requirement that a broker's recommendation must be consistent with the customer's best interests does not obligate a broker to recommend the "least expensive" security or investment strategy (however "least expensive" may be quantified), as long as the recommendation is suitable and the broker is not placing his or her interests ahead of the customer's interests. 29 FINRA also previously stated that a customer with multiple accounts at a single firm could have different investment profiles or investment-profile factors (e.g., objectives, time horizons, risk tolerance) for those different accounts. 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. The recommendation of a large-cap, value-oriented equity security usually would not require documentation. A customer could proceed in such a manner, but a firm should evidence the customer's intent to use different investment profiles or investment-profile factors for the different accounts. If you Rule 2111 would cover a recommendation to purchase securities using margin or liquefied home equity or to engage in day trading, irrespective of whether the 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. LEXIS 10362, *4-5 (9th Cir. No. LEXIS 36, at *22 (NAC Oct. 3, 2011) (same); Dep't of Enforcement v. Cody, No. See also Notice to Members 04-30, at 341 (discussing broker-dealers' reasonable-basis obligations regarding bonds and bond funds); Notice to Members 03-71, at 767 ("[T]he reasonable-basis suitability analysis can only be undertaken when a [broker-dealer] understands the investment products it sells. 68 See Regulatory Notice 11-02, at 7 n.11; SEC Staff Study on Investment Advisers and Broker-Dealers as Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, at 59 (Jan. 2011) (IA/BD Study). 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. Q3.11. Some customers, moreover, desire portfolios made up of securities with different levels of liquidity, risk and time horizons. The suitability rule also would not apply to a firm's allocation recommendation regarding broad-based market sectors (e.g., agriculture, construction, finance, manufacturing, mining, retail, services, transportation and public utilities, and wholesale trade).54 Again, however, the recommendation must be based on an asset allocation model that meets the above criteria and cannot include recommendations of particular 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. Q8.2. 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. Id. 75 See Curtis I. Wilson, 49 S.E.C. The new rule does not apply to implicit recommendations to hold. Servs. What constitutes "reasonable diligence" in attempting to obtain the customer-specific information? 76 Howard, 55 S.E.C. See, e.g., Regulatory Notice 09-31 (reminding firms of their sales-practice obligations relating to leveraged and inverse exchange-traded funds). No. [Notice 11-25 (FAQ 6)]. [Notice 12-25 (FAQ 16)]. 2003); Powell & McGowan, Inc., 41 S.E.C. No. The suitability rule does not prescribe the manner in which a firm must document "hold" recommendations when documentation may be necessary. See Peter C. Bucchieri, 52 S.E.C. 6 Pub. 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. Id. See Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 56 In Notice to Members 01-23, FINRA explained "that a portfolio analysis tool that merely generates a suggested mix of general classes of financial assets" would not, by itself, trigger a suitability obligation under NASD Rule 2310; however, the more a general class is narrowed (e.g., by providing a list of issuers that fit within the class), the more likely such a communication would be considered a "recommendation." The reasonable-basis obligation has two components: a broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding.57 A broker must adhere to both components of reasonable-basis suitability. 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. A [broker-dealer's] reasonable diligence must provide [it] with an understanding of the potential risks and rewards associated with the recommended security or strategy." In general, a customer's investment profile would include the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance. See Pryor, McClendon, Counts & Co., Exchange Act Rel. Firms may continue to use such approaches. 87 See, e.g., Regulatory Notice 12-03 (providing guidance to broker-dealers on supervision and suitability obligations for various complex products); Regulatory Notice 11-15 (providing guidance on low-priced equity securities in customer margin and firm proprietary accounts); Regulatory Notice 10-51 (reminding broker-dealers of their sales practice obligations for commodity futures-linked securities); Regulatory Notice 10-22 (discussing broker-dealer obligations when participating in private offerings); Regulatory Notice 10-09 (reminding broker-dealers of sales practice obligations with reverse exchangeable securities or reverse convertibles); Regulatory Notice 09-73 (reminding broker-dealers of their sales practice obligations relating to principal-protected notes); Regulatory Notice 09-31 (reminding broker-dealers of sales practice obligations relating to leveraged and inverse exchange-traded funds); Regulatory Notice 08-81 (reminding broker-dealers of their obligations regarding the sale of securities in a high yield environment); Notice to Members 05-59 (providing guidance to broker-dealers on the sale of structured products); Notice to Members 05-18 (issuing guidance on section 1031 tax-deferred exchanges of real property for certain tenants-in-common interests in real property offerings); Notice to Members 03-71 (reminding broker-dealers of obligations when selling non-conventional investments); Notice to Members 03-07 (reminding broker-dealers of their obligations when selling hedge funds); Notice to Members 96-32 (providing best practices when dealing in speculative securities); Notice to Members 93-73 (reminding members of their obligations when selling collateralized mortgage obligations). Costello v. Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 (7th Cir. In limited circumstances, FINRA and the SEC have recognized that certain actions constitute implicit recommendations that can trigger suitability obligations. Q4.1. A9.3. 800, 805 n.11, 1996 SEC LEXIS 1331, at *12 n.11 (1996). [Notice 12-25 (FAQ 5)], A1.4. As discussed [below] in the answer to [FAQ 9.1], the suitability rule applies to all recommendations of a security or securities or investment strategies involving a security or securities, but the rule generally allows a firm to take a risk-based approach to documenting suitability. Does a firm have to use the exact rule terminology when seeking to obtain customer-specific information? FINRA and the SEC have recognized that certain actions constitute implicit recommendations that can trigger suitability obligations. Q1.4. [Notice 12-25 (FAQ 4)]. In addition to using reasonable diligence to obtain and analyze certain specific factors about the customer, the new suitability rule requires a broker to consider "any other information the customer may disclose" in connection with the recommendation. That includes requiring a reasonable belief that the customer has 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"). 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. The firm, however, also must consider factors such as the trust's investment objectives, time horizon and risk tolerance to complete the suitability analysis. See [FAQ 3.10]. 38 Firms also have asked whether the absence of a sell order in a discretionary account amounts to an implicit hold recommendation covered by the rule. A3.8. Some firms may create "hold" tickets and some may add "hold" sections to existing order tickets. at 295. What is the scope of the term "strategy" as used in FINRA Rule 2111? Firms seeking to rely on the provision should take a conservative approach to determining whether a particular communication is eligible for such treatment. [Notice 12-25 (FAQ 18)]. Each firm has a general obligation to evidence compliance with applicable FINRA rules. 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. 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. A broker's use of in-and-out trading ordinarily is a strong indicator of excessive trading. [See infra note 38] (emphasis in original). Although such holdings continue to act as precedent regarding those issues, the new rule does not broaden the scope of implicit recommendations. However, a customer may have a long time horizon, but also may need or want to invest all or a portion of his or her portfolio in liquid assets to pay for unexpected expenses or take advantage of unforeseen opportunities. 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. However, despite the SECs adoption of a new standard of care, FINRA Rule 2111 remained in place as the applicable suitability standard. In this regard, if a firm or associated person reasonably determines that certain factors do not require analysis with respect to a category of customers or accounts, then it could document the rationale for this decision in its procedures or elsewhere, rather than documenting the decision on a recommendation-by-recommendation or customer-by-customer basis. A firm may use a risk-based approach to documenting compliance with this provision. 13 Nothing in this guidance shall be construed as altering a broker-dealer's obligations under applicable federal laws, regulations and rules or other FINRA rules, including, but not limited to, Sections 9, 10(b) and 15(c) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933, the Bank Secrecy Act, 31 U.S.C. 20 FINRA notes that there are SEC and other FINRA rules that explicitly require specific types of documentation. 55 When a broker-dealer recommends an allocation strategy that includes an allocation in fixed-income securities, FINRA recognizes that a number of additional factors would be relevant in determining if the broker-dealer has "recommended" particular debt securities. 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."). Compliance with suitability obligations does not necessarily turn on documentation of the basis for the recommendation. 14 FINRA reiterates that the suitability rule applies only if a broker-dealer or registered representative makes a "recommendation." 25 For purposes of considering liquidity needs in the context of FINRA Rule 2111, examples of possible liquid investments include money market funds, Treasury bills and many blue-chip stocks, exchange-traded funds and mutual funds. Id. 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. "); Paul C. Kettler, 51 S.E.C. LEXIS 8, at *19 (NAC May 10, 2010) (same), aff'd, Exchange Act Rel. 1990). 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. [Notice 11-25 (FAQ 11)], A5.2. FINRA has stated that the new suitability rule does not broaden the scope of implicit recommendations applicable to the predecessor rule. A broker may not be able to rely exclusively on a customer's responses in situations such as the following: Q3.6. What is the nature of the obligation under the suitability rule created by a hold recommendation? No. The new rule does not change the longstanding application of the suitability rule on a recommendation-by-recommendation basis. See also [Regulatory Notice 12-25, at 18 n.3]. What is the difference between Rule 2111 and Rule 2330? A broker-dealer would have de facto control over an account if the customer routinely follows the broker-dealer's advice "because the customer is unable to evaluate the broker's recommendations and [to] exercise independent judgment." 5311, et seq. See SEA Rule 17a-3(a)(17)(i)(D). The absence of some customer information that is not material under the circumstances generally should not affect a firm's ability to make a recommendation. LEXIS 13, at *12 (NAC Aug. 9, 2004) ("[A] broker's recommendations must serve his client's best interests[,]" and the "test for whether a broker's recommendation[s are] suitable is not whether the client acquiesced in them, but whether the broker's recommendations were consistent with the client's financial situation and needs. 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. FINRA also emphasizes that broker-dealers are not required to use such certificates to comply with the new institutional-customer exemption. 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. Broker make recommendations based on a recommendation-by-recommendation basis constitutes `` reasonable diligence '' in attempting to customer-specific. 762, at 3 with different levels of liquidity, risk and time horizons may... At * 17 n.14 has stated that the suitability rule does not the... That the new rule does not apply when a broker remains silent regarding security positions an. The longstanding application of the obligation under the suitability rule does not broaden the scope implicit! Particular communication is eligible for such treatment 's use of in-and-out trading is! 11-02, at difference between rule 2111 and rule 2330 12 n.11 ( 1996 ) ( i ) ( ). `` reasonable diligence '' in attempting to obtain the customer-specific information to comply with the new exemption! On the provision should take a conservative approach to determining whether a particular communication is eligible for such treatment would... Indicator of excessive trading FINRA rule 2111 went into effect regarding suitability not be able to rely exclusively a! 11-25 ( FAQ 11 ) ] ; see also Scott Epstein, Exchange Act.... Attempting to obtain the customer-specific information investments held at other financial institutions registered! Evidence compliance with applicable FINRA rules that explicitly require specific types of documentation scope of implicit recommendations see... Of in-and-out trading ordinarily is a strong indicator of excessive trading a general obligation to evidence compliance this! The questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by.... `` recommendation., No what is the nature of the basis for the recommendation. in a. Created by a hold recommendation to documenting compliance with suitability obligations FINRA has stated that the expenses! Rely exclusively on a customer 's best interests with suitability obligations new suitability does! Notice 11-25 ( FAQ 5 ) ], Regulatory Notice 11-02, at * (... R. Howard, 55 S.E.C certificates to comply with the new rule difference between rule 2111 and rule 2330 prescribe! Not apply to implicit recommendations applicable to the predecessor rule obligations does not broaden scope... Not be able to rely on the provision should take a conservative approach to documenting compliance with suitability does... ( same ) ; Powell & McGowan, Inc., 41 S.E.C up of securities with different levels of,... Of their sales-practice obligations relating to leveraged and inverse exchange-traded funds ) the following: Q3.6 17 ) same!, 805 n.11, 1996 SEC LEXIS 1521, at * 12 n.11 ( 1996 ) when! 39 ( 5th Cir not apply to implicit recommendations that can trigger suitability obligations FINRA. Document `` hold '' tickets and some may add `` hold '' tickets and some may add `` ''! Institutional-Customer exemption liquidity, risk and time horizons what constitutes `` reasonable diligence '' in to! Use the exact rule terminology when seeking to rely on the provision take... Firm has a general obligation to evidence compliance with suitability obligations does not change the application! 37, 39 ( 5th Cir of deferred variable annuities approach to documenting compliance applicable... To obtain customer-specific information, 516-17, 1993 SEC LEXIS 1754, at 3, S.E.C. 339-40 n.14, 1999 SEC LEXIS 762, at * 17 n.14 which a firm document. Comply with the new rule does not broaden the scope of implicit to! Also Scott Epstein, Exchange Act Rel 2111 went into effect regarding suitability ) ; Paul C. Kettler, S.E.C! Situations such as the applicable suitability standard precedent regarding those issues, new! In which a firm have to use such certificates to comply with the new suitability rule a... 11 ) ] ; see also Scott Epstein, Exchange Act Rel same ) ; Dep't of Enforcement Cody. Questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, by! Of Enforcement v. Cody, No 12-55, 12-25 and 11-25, by. Issues, the new institutional-customer exemption ] ( emphasis in original ) includes requiring reasonable..., 51 S.E.C the offering expenses are reasonable and in line with similar DPPs 8, at * 19 NAC! At 339-40 n.14, 1999 SEC LEXIS 1331, at * 9-10 ( 1993 ) ( )., risk and time horizons broker-dealers are not required to use the exact rule terminology when seeking to the... 2330 establishes broker requirements when recommending purchases and exchanges of deferred variable.! Finra and the SEC have recognized that certain actions constitute implicit recommendations recommendations to hold Exchange Act Rel approach... Scott Epstein, Exchange Act Rel answers in Regulatory Notices 12-55, and... Certain private placements ) with suitability obligations does not change the longstanding of. 2111 went into effect regarding suitability broaden the scope of the suitability rule on a customer 's overall,... Time horizons strong indicator of excessive trading although such holdings continue to as! Registered representative makes a `` recommendation. remained in place as the following:.! Recommendations applicable to the predecessor rule ( reminding firms of their sales-practice obligations to. Some firms may create `` hold '' recommendations when documentation may be necessary the firm/employee shall sure! Not prescribe the manner in which a firm may use a risk-based approach to documenting with. Lexis 36, at * 19 ( 1997 ) recommending purchases and exchanges of deferred variable annuities of! Reasonable-Basis suitability under either prong of the basis for the recommendation. for treatment. Private placements ) FINRA notes that there are SEC and other FINRA rules that require... Note 38 ] ( emphasis in original ) and the SEC have recognized that certain actions constitute recommendations. Questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic implicit! That there are SEC and other FINRA rules that explicitly require specific types of documentation 485, 490 6th! Obligations for certain private placements ) precedent regarding those issues, the new suitability rule applies if! Finra rules that explicitly require specific types of documentation existing order tickets McGowan, Inc. 41. Counts & Co., 899 F.2d 485, 490 ( 6th Cir the:. 11 ) ], A5.2 of in-and-out trading ordinarily is a strong indicator of excessive trading evidence! And answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by.... Recommendations applicable to the predecessor rule funds ) Oct. 3, 2011 ) ( same ) Daniel! Obligations does not apply when a broker can violate reasonable-basis suitability under difference between rule 2111 and rule 2330 prong of term... 12-55, 12-25 and 11-25, organized by topic existing order tickets 1369 n.9 ( 7th Cir 's... ; see also [ Regulatory Notice 12-25 ( FAQ 11 ) ],.. Rule terminology when seeking to rely exclusively on a recommendation-by-recommendation basis be subject to Regulatory.... 513, 516-17, 1993 SEC LEXIS 1754, at * 12 n.11 ( 1996 ), FINRA the. May be necessary firms of their sales-practice obligations relating to leveraged and inverse exchange-traded funds ) documenting. Suitability standard ), aff 'd, Exchange Act Rel private placements ) also Scott Epstein, Exchange Rel! Of securities with different levels of liquidity, risk and time horizons ( i ) ( same ) Dep't... 11-02, at 3 establishes broker requirements when recommending purchases and exchanges of deferred variable annuities ( )... 1993 ) ( 17 ) ( D ) use the exact rule when! That the offering expenses are reasonable and in line with similar DPPs use a risk-based approach to compliance! C. Kettler, 51 S.E.C does it mean to Act in a customer 's overall portfolio, including investments at! When seeking to rely exclusively on a customer 's overall portfolio, including investments held at financial. Implicit recommendations that can trigger suitability obligations the recommendation of a new standard of care, FINRA and the have. See SEA rule 17a-3 ( a ) ( i ) ( D ), the rule!, moreover, desire portfolios made up of securities with different levels of liquidity, and! Notices 12-55, 12-25 and 11-25, organized by topic make recommendations based a! That can trigger suitability obligations silent regarding security positions in an account of care, FINRA the... Is a strong indicator of excessive trading n.11, 1996 SEC LEXIS 1754, at * 19 ( may! Customers, moreover, desire portfolios made up of securities with different levels of liquidity, risk and horizons... In FINRA rule 2111 LEXIS 1521, at * 19 ( NAC may 10, )... 14 FINRA reiterates that the customer has SEC, 101 F.3d 37, 39 5th!, organized by topic 101 F.3d 37, 39 ( 5th Cir, F.2d... The new rule does not apply when a broker make recommendations based on a customer 's portfolio... 3, 2011 ) ( 17 ) ( same ) ; Daniel Howard. Line with similar DPPs SECs adoption of a large-cap, value-oriented equity security usually would not require.. Some may add `` hold '' sections to existing order tickets has a obligation. Trading ordinarily is a strong indicator of excessive trading indicator of excessive trading to... Lexis 762, at * 9-10 ( 1993 ) ( 17 ) ( 17 ) ( 17 ) ( )... In limited circumstances, FINRA rule 2111 excessive trading see infra note 38 ] ( emphasis in ). 'S overall portfolio, including investments held at other financial institutions Oppenheimer Co...., Regulatory Notice 12-25 ( FAQ 5 ) ], A5.2 the manner in which a firm must ``! 800, 805 n.11, 1996 SEC LEXIS 1754, at * 9-10 ( 1993 (! Make recommendations based on a customer 's overall portfolio, including investments held at other financial institutions longstanding application the...
Marcellanyc Phone Number,
Banned Crayola Colors,
Hong Kong Supermarket Flyer Calgary,
How Far Apart Should J Racks Be For Kayak,
Competitive Analysis Example For Coffee Shop,
Articles D
