70 See Epstein, 2009 SEC LEXIS 217, at *42 (stating that the broker's "mutual fund switch recommendations served his own interest by generating substantial production credits, but did not serve the interests of his customers" and emphasizing that the broker violated the suitability rule "when he put his own self-interest ahead of the interests of his customers"). 10 See Notice to Members 04-72, at 846 ("The BD of record refers to the broker-dealer identified on a customer's account application for accounts held directly at a mutual fund or variable insurance product issuer. This rule does not apply to: Transfers and [1] Weirdly, Rule 2330 does NOT explicitly cover recommendations involving a strategy, as Rule 2111 does. [Notice 11-25 (FAQ 4)]. As described in greater detail in FAQ [4.7], there is a safe harbor for certain types of educational information and asset allocation models that otherwise could be considered investment strategies captured by the new rule. For instance, some relatively liquid products can be complex and/or risky and therefore unsuitable for some customers. C05020055, 2007 NASD Discip. ", A broker who recommended "that his customers purchase promissory notes to give him money to use in his business.". 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. 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. The significance of specific types of customer information generally will depend on the facts and circumstances of the particular case, including the nature and characteristics of the product or strategy at issue. Q9.2. A firm should educate its associated persons on the potential risks and rewards of the products that the firm permits them to recommend. [Notice 11-25 (FAQ 7)]. A suitability analysis of a particular recommendation and consideration of a customer's overall investment portfolio, however, are not mutually exclusive concepts. 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. 4, 1997 ("[T]he staff agrees that a reference to an investment company or an offer of investment company shares in an advertisement or piece of sales literature would not by itself constitute a 'recommendation' for purposes of [the suitability rule]."). 35 For certain requirements related to day trading, see FINRA Rules 2130 and 2270. Firm compliance professionals can access filings and requests, run reports and submit support tickets. Firms must attempt to obtain and analyze relevant customer-specific information. The firm/employee shall make sure that the offering expenses are reasonable and in line with similar DPPs. 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. [Notice 12-25 (FAQ 4)]. Id. A3.12. SEA Rule 17a-3 also states that the broker-dealer must furnish such customer or owner a copy of the required account record information or alternative document with all information required by SEA Rule 17a-3(a)(17)(i)(A), including an explanation of any terms regarding investment objectives, for verification within 30 days of account opening and at least once every 36 months thereafter. [Notice 12-25 (FAQ 15)], A3.2. 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. A3.5. 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. The hold recommendation must be explicit.5, Q1.3. Does a broker-dealer have to seek to obtain all of the customer-specific factors listed in the new rule by the rule's implementation date? A3.7. 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. 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." Some customers, moreover, desire portfolios made up of securities with different levels of liquidity, risk and time horizons. What is the difference between Rule 2111 and Rule 2330? See also [Regulatory Notice 12-25, at 18 n.3]. denied, 130 S.Ct. 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. 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. "93 A broker-dealer can consider a variety of approaches to identifying and supervising its registered representatives' recommendations of investment strategies involving both a security and a non-security component. 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[.]" Members' Responsibilities Regarding Deferred Variable Annuities Selected Notices: 07 65 Turnover rate is calculated by "dividing the aggregate amount of purchases in an account by the average monthly investment. New FAQs will be identified when added. ; Regulatory Notice 11-02, at 4-5. FINRA cautioned, however, that a firm should evidence a customer's intent to use different investment profiles or factors for the different accounts. Chase, 56 S.E.C. Any significant variation from the list in the safe-harbor provision would be subject to regulatory scrutiny. Finally, the rule provides a modified institutional-customer exemption. 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. 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. 21 For an expanded discussion of this issue, see [FAQ 3.4]. [Notice 12-25 (FAQ 20)]. A broker who sought to increase his commissions by recommending that customers use margin so that they could purchase larger numbers of securities. 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. FINRA stated that, "[t]o 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." No. In addition, documentation by itself does not cure an otherwise unsuitable recommendation. Other firms may require emails or memoranda to supervisors or emails or letters to customers copying supervisors. 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. 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. No. See also [Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability), 75 Fed. Indeed, Supplementary Material .04 states that a member need not seek to obtain and analyze all of the factors if it "has a reasonable basis to believe, documented with specificity, that one or more of the factors are not relevant components of a customer's investment profile in light of the facts and circumstances of the particular case." This standard recognizes that a supervisory system cannot guarantee firm-wide compliance with all laws and regulations. Id. Rule 2330 requires firms to have written policies and procedures in place for surveillance of brokers recommending, purchasing or exchanging of deferred variable annuities. See SEA Rule 17a-3(a)(17)(i)(B)(1). In general, however, when there is an indication that the institutional customer is not capable of analyzing, or does not intend to exercise independent judgment regarding, all of a broker-dealer's recommendations, the broker-dealer necessarily will have to be more specific in its approach to ensuring that it complies with the exemption. Can a customer with multiple accounts at a single firm have different investment profiles or investment-profile factors (e.g., objectives, time horizons, risk tolerance) for those different accounts? Accounts held in this manner are sometimes referred to as 'check and application,' 'application way,' or 'direct application'business."). ", Q1.2. 30, 32 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended). 5311, et seq. FINRA has stated that the new suitability rule does not broaden the scope of implicit recommendations applicable to the predecessor rule. Some customers may be reluctant to provide certain types of information to their broker-dealers. No. Firms seeking to rely on the provision should take a conservative approach to determining whether a particular communication is eligible for such treatment. See, e.g., Regulatory Notice 09-31 (reminding firms of their sales-practice obligations relating to leveraged and inverse exchange-traded funds). Q3.10. A broker's use of in-and-out trading ordinarily is a strong indicator of excessive trading. 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. 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. A broker-dealer need not automatically use a detailed approach when no such indication exists, although providing at least some level of specificity (even if not required) may help eliminate misunderstandings. [Notice 12-25 (FAQ 25)]. How should a firm document "hold" recommendations? The rule also explicitly covers recommended investment strategies involving securities, including recommendations to "hold" securities. The new rule does not apply to implicit recommendations to hold. If approved by the SEC, the effective date will be June 30 Reg BIs compliance date. As discussed below in the answer to [FAQ 8.3], firms can use any number of approaches to complying with the new exemption requirements. 52562, 52567 (Aug. 26, 2010)]. Costello v. Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 (7th Cir. Rule 2330 establishes broker requirements when recommending purchases and exchanges of deferred variable annuities. A1.3. 2 See, e.g., SEC Adoption of Rules Under Section 15(b)(10) of the Exchange Act, 32 Fed. 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. A particular recommendation and consideration of a customer 's overall investment portfolio, however, are mutually! [ Notice 12-25, at 18 n.3 ], at 18 n.3 ] list in the rule... Have to seek to obtain all of the customer-specific factors listed in the rule! 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