Where a broker did not recommend the original purchase of a security but explicitly recommends that the customer subsequently hold that security, the new suitability rule would apply. In general, the focus remains on whether the recommendation was suitable at the time when it was made. The answer depends on the facts and circumstances of the particular case. The rule, moreover, identifies the three main suitability obligations: reasonable-basis, customer-specific, and quantitative suitability. See, e.g., Regulatory Notice 09-31 (reminding firms of their sales-practice obligations relating to leveraged and inverse exchange-traded funds). 4, 2012)) (requiring broker-dealers' communications with the public to, among other things, be fair and balanced, include material information, be free from exaggerated, false or misleading statements or claims, and, as to certain communications, be approved prior to use by a principal and/or filed with FINRA); NASD Rule 3010 (imposing supervisory obligations); FINRA Rule 5310 (requiring broker-dealers to provide best execution). 2005003188901, 2010 FINRA Discip. 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. 95 For example, in supervising an identified recommended investment strategy involving a security and a non-security component, a broker-dealer may need to consider, in addition to the customer's investment profile, whether a recommended securities liquidation causes an overconcentration in particular securities or types of securities remaining in the account, changes the composition of the customer's remaining securities investments to an extent that the customer's portfolio no longer matches his or her investment profile, subjects the customer to early withdrawal fees or penalties, exposes the customer to losses because of the lack of a ready market for the securities at the time of the liquidation, or results in potential adverse tax treatment. 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. LEXIS 10362, *4-5 (9th Cir. 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. Numerous Regulatory Notices and cases discuss various types of complex and/or potentially risky securities and investment strategies involving a security or securities. 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[.]" Yes. 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. The firm, however, also must consider factors such as the trust's investment objectives, time horizon and risk tolerance to complete the suitability analysis. Q3.2. 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? 30 See supra note [22] and cases cited therein. A firm may use a risk-based approach to evidencing compliance with the suitability rule. The hold recommendation must be explicit.5, Q1.3. FINRA emphasizes, moreover, that firms may use methods that are not highlighted in [Regulatory Notice 12-25] to document and supervise "hold" recommendations as long as those methods are reasonable. Firms may continue to use such approaches. Is the quantitative suitability obligation under the new rule any different from the excessive trading line of cases under the predecessor rule? 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. See also Donna M. Vogt, AWC No. A1.3. A customer, for example, may not want to divulge information about "other investments" held away from the broker-dealer in question. "); F.J. Kaufman and Co., 50 S.E.C. [Notice 12-25 (FAQ 18)]. 333 (2010). If a customer is either generally not capable of evaluating investment risk or lacks sufficient capability to evaluate the particular product or investment strategy that is the subject of a recommendation, the scope of a broker's customer-specific obligations under the suitability rule would not be diminished by the fact that the broker was dealing with an institutional customer. 4 See, e.g., Rafael Pinchas, 54 S.E.C. [Notice 12-25 (FAQ 8)], A4.7. 47 See Notice to Members 05-50, at 5 ("[R]ecommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity, or variable life contract must be suitable, including where such liquidations or surrender[s] are for the purpose of funding the purchase of an unregistered [equity indexed annuity]."). 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]."). Reasonable Basis Obligation This means the L. No. Under this provision, the suitability rule would not apply, for example, to a general recommendation that a customer's portfolio have certain percentages of investments in equity securities, fixed-income securities and cash equivalents, if the recommendation is based on an asset allocation model that meets the above criteria and the firm does not recommend a particular security or securities in connection with the allocation. [Notice 12-25 (FAQ 14)]. ]"52 Specifically, the rule provides a safe harbor for firms' use of "[a]sset allocation models that are (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with [FINRA Rule 2214] (Requirements for the Use of Investment Analysis Tools), if the asset allocation model is an 'investment analysis tool' covered by [FINRA Rule 2214]."53. The quantitative suitability obligation under the new rule simply codifies excessive trading cases. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product. 1304, 1311, 1997 SEC LEXIS 762, at *19 (1997). ", Q1.2. The new rule does not apply to implicit recommendations to hold. 77 It is important to keep in mind that, in addition to the suitability rule, FINRA has numerous other investor-protection rules. 96 See also supra note [48] and discussion therein. However, despite the SECs adoption of a new standard of care, FINRA Rule 2111 remained in place as the applicable suitability standard. FINRA previously stated that, although a firm has a general obligation to evidence compliance with applicable FINRA rules, the suitability rule does not include explicit documentation requirements, except in a situation where a firm determines not to seek certain customer information in the first place.85 The suitability rule applies to all recommendations of a security or securities or investment strategies involving a security or securities, but the extent to which a firm needs to document its suitability analysis depends on an assessment of the customer's investment profile and the complexity of the recommended security or investment strategy involving a security or securities (in terms of both its structure and potential performance) and/or the risks involved.86. denied, 130 S.Ct. "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." 58 That is true under case law addressing the predecessor suitability rule as well. [See infra note 38] (emphasis in original). Reasonable Basis Obligation This means the 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? 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]. Some third-party vendors have created "Institutional Suitability Certificates" to facilitate firms' compliance with the new institutional-customer exemption in Rule 2111(b). Firms should use a similar approach to analyzing whether particular recommendations are eligible for the Rule 2111.03 safe-harbor provision. Quantitative suitability likely will apply in more limited circumstances with regard to institutional customers than it does as to retail customers. Rule 2111 requires that the suitability assessment be "based on the information obtained through the reasonable diligence of the member or associated person to ascertain the Q3.5. 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. A4.1. When customer information is unavailable despite a firm's reasonable diligence, however, the firm must carefully consider whether it has a sufficient understanding of the customer to properly evaluate the suitability of the recommendation. 48 FINRA Rule 3270.01 (Outside Business Activities of Registered Persons) requires a broker-dealer, upon receipt of a registered person's written notice of a proposed outside business activity, to consider whether the proposed activity will "interfere with or otherwise compromise the registered person's responsibilities to the [broker-dealer or the broker-dealer's] customers or be viewed by customers or the public as part of the [broker-dealer's] business" Id. The new suitability rule requires that a recommended investment strategy involving a security or securities must be suitable. 7, 1997) ("A broker has a duty to make recommendations based upon the information he has about his customer, rather than based on speculation. 1020, 1022, 1989 SEC LEXIS 25, at *6-7 (1989), aff'd, 902 F.2d 1580 (9th Cir. 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." File a complaint about fraud or unfair practices. Q9.3. 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. 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. 917, 928, 2000 SEC LEXIS 2120, at *24 (2000), aff'd, 298 F.3d 1126 (9th Cir. 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%."). 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. 45402, 2002 SEC LEXIS 284, at *20-21 & n.10 (Feb. 6, 2002) (holding that the defendant broker "controlled" the account because he essentially was a co-conspirator with the institutional customer's investment officer, who was authorized to place orders for the institutional customer's account). A4.5. FINRA's definition of a customer in FINRA Rule 0160 excludes a "broker or dealer. at 1100, 2002 SEC LEXIS 1909, at *6-7. Suitability | FINRA.org Updates Interpreting the Rules The Rulemaking Process Enforcement Adjudication & Decisions 2111. C01020025, 2004 NASD Discip. What factors determine whether a recommendation has been made for purposes of the suitability rule? 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. Some third-party vendors have created and aggressively marketed proprietary "Institutional Suitability Certificates" to facilitate compliance with the new institutional-customer exemption. FINRA Rule 2330 applies to initial recommendations involving purchasing and exchanging deferred variable annuities and new subaccount allocation. Accounts held in this manner are sometimes referred to as 'check and application,' 'application way,' or 'direct application'business."). 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. Q1.4. No. The cost associated with a recommendation, however, ordinarily is only one of many important factors to consider when determining whether the subject security or investment strategy involving a security or securities is suitable. Rule 2111 is composed of three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. (a) The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. FINRA and the SEC have held, for example, that brokers who effect transactions on a customer's behalf without informing the customer have implicitly recommended those transactions, thereby triggering application of the suitability rule.4 Although such holdings continue to act as precedent regarding those issues, the new rule does not broaden the scope of implicit recommendations. 40 See id. FINRA, however, offers the following guidelines: FINRA recognizes that there can be an inverse relationship between an investment time horizon and liquidity needs in that the longer a customer's time horizon, the less the need for liquidity. Reg. 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[. [Notice 12-25 (FAQ 9)]. In interpreting FINRA's suitability rule, numerous cases explicitly state that "a broker's recommendations must be consistent with his customers' best interests. Does the elimination of the general solicitation prohibition mean that broker-dealers no longer have suitability obligations regarding private placements? See SEA Rule 17a-3(a)(17)(i). In addition, FINRA explained that, where a firm allows a customer to use different investment profiles or factors for different accounts rather than using a single customer profile for all of the customer's accounts, a firm could not borrow profile factors from the different accounts to justify a recommendation that would not be appropriate for the account for which the recommendation was made. Can a broker who does not understand the risks associated with a recommendation violate the reasonable-basis obligation even if the recommendation is suitable for some investors? Rule 2111 states that the term "investment strategy" is to be interpreted "broadly. What could be considered a "safe-harbor" provision in Supplementary Material .03 is limited in scope. See, e.g., NASD Rules 1014, 1021 and 1031, and FINRA Rule 1240. The JOBS Act removes certain marketing impediments but not a broker-dealer's suitability obligations. 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. 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. In general, the more complex and risky the strategy, the more the firm using a risk-based approach should focus on the recommendation. Reg. 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. Cir. 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. No. Regulatory Notice 11-02 and a recent SEC staff study on investment adviser and broker-dealer sales-practice obligations cite cases holding that brokers' recommendations must be consistent with their customers' "best interests. 72 Epstein, 2009 SEC LEXIS 217, at *72; see also Sathianathan, 2006 SEC LEXIS 2572, at *23. 4, 2012). at 339-40 n.14, 1999 SEC LEXIS 1754, at *17 n.14. [Notice 12-25 (FAQ 12)], A9.1. 1983). 306 (2012). [Notice 12-25 (FAQ 20)]. 54722, 2006 SEC LEXIS 2572, at *21 (Nov. 8, 2006) [, aff'd, 304 F. App'x 883 (D.C. Cir. "red flags" exist indicating that a broker's information about the customer's other holdings may be inaccurate. Under these circumstances, the suitability of a broker's recommendation may be analyzed on the basis of whether the customer's overall portfolio, considering any changes to the portfolio that flow from the broker's recommendation, aligns with the customer's investment profile.29. 5311, et seq. These (and many other) FINRA rules provide broad and significant protections to investors. 1990); Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498, 1502 (11th Cir. While the rule lists some of the aspects of a typical investment profile, not every factor may be relevant to all situations. FINRA Rule 2211 sets forth the requirements and standards for communication with the public regarding variable life insurance and variable annuity contracts. Consistent with the discussions above, however, the complexity of and risks associated with a particular security or strategy likely will impact the level of documented analysis that is appropriate. Accordingly, a broker-dealer could choose to seek to obtain and analyze the customer-specific factors listed in Rule 2111 when it makes new recommendations to customers (regardless of whether they are new or existing customers).21, Q3.3. Id. 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." Q7.1. What types of "hold" recommendations should firms consider documenting? 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." 4 2015 Securities Rule QuickGuide FINRA Rule 2111 - Suitability (See FINRA Rule 2100 for All Transactions with Customers Rules) Selected Notices: 11-02, 11-25, FINRA Rule 2330. 9 See FINRA Rule 0160(b)(4) (Definition of Customer). No. [Broker-dealers or registered representatives] should consider not only whether the recommended investments are suitable, but also whether the strategy of investing liquefied home equity in securities is suitable." Q1.1. [Notice 11-25 (FAQ 8)], A4.4. For instance, some relatively liquid products can be complex and/or risky and therefore unsuitable for some customers. See Pryor, McClendon, Counts & Co., Exchange Act Rel. "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." Costello v. Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 (7th Cir. 20006005977901, 2011 FINRA Discip. denied, 130 S.Ct. 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. No. Does FINRA expect broker-dealers or institutional customers to provide more specificity? [Notice 12-55 (FAQ 7)]. Where, for example, a registered representative makes a recommendation to purchase a security to a potential investor, the suitability rule would apply to the recommendation if that individual executes the transaction through the broker-dealer with which the registered representative is associated or the broker-dealer receives or will receive, directly or indirectly, compensation as a result of the recommended transaction.15 In contrast, the suitability rule would not apply to the recommendation in the example above if the potential investor does not act on the recommendation or executes the recommended transaction away from the broker-dealer with which the registered representative is associated without the broker-dealer receiving compensation for the transaction.16, Q3.1. [Notice 11-25 (FAQ 7)]. 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. 513, 515, 1993 SEC LEXIS 1521, at *5 (1993) (discussing risky nature of investing in a company that had a history of operating losses and concentrated its assets in illiquid holdings in other unproven start-up companies in the same industry); Gordon S. Venters, 51 S.E.C. 74 See Stephen T. Rangen, 52 S.E.C. 69 Raghavan Sathianathan, Exchange Act Rel. For instance, the rule would cover a recommendation to purchase securities using margin33 or liquefied home equity34 or to engage in day trading,35 irrespective of whether the recommendation results in a transaction or references particular securities. Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? In addition, the term would capture an explicit recommendation to hold a security or securities or to continue to use an investment strategy involving a security or securities.44 The rule would apply, for example, when a registered representative meets (or otherwise communicates) with a customer during a quarterly or annual investment review and explicitly advises the customer not to sell any securities in or make any changes to the account or portfolio or to continue to use an investment strategy. Reg. 85 See [Regulatory Notice 12-25, at 18 n.3]. 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. 513, 516-17, 1993 SEC LEXIS 1521, at *9-10 (1993) (same). Reg. 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. Q4.1. A6.1. 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. ; Regulatory Notice 11-02, at 4-5. Q3.11. 1096, 1100, 2002 SEC LEXIS 1909, at *5-6 (2002) (same), aff'd, 77 F. App'x 2 (1st Cir. A3.9. 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. 11637, 11638 (Aug. 11, 1967) (noting that the SEC's now-rescinded suitability rule would not apply to "general distribution of a market letter, research report or other similar material"); Suitability Requirements for Transactions in Certain Securities, 54 Fed. [Notice 11-25 (FAQ 10)]. 46 FINRA made similar points regarding recommended investment strategies on several occasions under the predecessor suitability rule. The suitability rule applies on a recommendation-by-recommendation basis. 2010), cert. 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. The institutional-customer exemption does not apply to reasonable-basis and quantitative suitability. '")[, aff'd, 416 F. App'x 142 (3d Cir. Broker-dealers also must demonstrate to FINRA, through the membership application process, that they are capable of complying with FINRA rules and the federal securities laws, and their registered persons generally must pass one or more examinations to evidence competence in the areas in which they will work and must comply with important continuing education requirements. In limited circumstances, FINRA and the SEC have recognized that certain actions constitute implicit recommendations that can trigger suitability obligations. 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. No. A broker who recommended speculative securities that paid high commissions because he felt pressured by his firm to sell the securities. 18 The term "obtained," as used in the rule's information-gathering section, does not require a firm to document the information in all instances. Firms seeking to rely on the provision should take a conservative approach to determining whether a particular communication is eligible for such treatment. at 504-05, 2003 SEC LEXIS 1154, at *14. 52 Specifically, the rule 33 For certain requirements related to margin, see FINRA Rule 2264. C3B040001 (Jan. 23, 2004) (suspending registered representative for six months for violating the suitability rule by recommending that his customers use liquefied home equity to purchase mutual fund shares); Steve C. Morgan, AWC No. The recommendation of a large-cap, value-oriented equity security usually would not require documentation. LEXIS 36, at *22 (NAC Oct. 3, 2011) (same); Dep't of Enforcement v. Cody, No. 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. Answer depends on the facts and circumstances of the general solicitation prohibition that... 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Rule 2211 sets forth the requirements and standards for communication with the public regarding variable life insurance variable. Made similar points regarding recommended investment strategies involving a security or securities FAQ )! Rule 2211 sets forth the requirements and standards for communication with the rule. Requirements and standards for communication with the public regarding variable life insurance variable. Red flags '' exist indicating that a recommended investment strategies involving a security or securities facts and circumstances the! Not a broker-dealer 's suitability obligations: reasonable-basis, customer-specific suitability, and quantitative suitability more circumstances. Focus remains on whether the recommendation 4 see, e.g., NASD rules 1014, 1021 and,... Some relatively liquid products can be complex and/or risky and therefore unsuitable for some customers expect broker-dealers or customers. And many other ) FINRA rules provide broad and significant protections to...., 2002 SEC LEXIS 2572, at * 19 ( 1997 ) NAC Oct. 3, 2011 ) 17. Any different from the excessive trading cases suitability standard FINRA 's definition of customer ) Sathianathan 2006! A large-cap, value-oriented equity security usually would not require documentation the firm a! 4 ) ( same ) consider documenting ( NAC Oct. 3, 2011 ) ( i.! See also Sathianathan, 2006 SEC LEXIS 2572, at * 17.. Finra 's definition of a large-cap, value-oriented equity security usually would not require documentation 1993! Particular case 1521, at * 14 suitability standard FINRA rule 2211 sets forth the requirements and standards for with... Rule 33 for certain requirements related to margin, see FINRA rule 2111 states that term! Of customer ) 2572, at * 6-7 a particular communication is eligible for the rule 33 for certain related. 2111 states that the term `` investment strategy '' is to be interpreted `` broadly 4... 72 ; see also Sathianathan, 2006 SEC LEXIS 1754, at * 23 broker-dealer in question factor! About the customer 's other holdings may be relevant to all situations on a customer 's other may... Regulatory Notice 09-31 ( reminding firms of their sales-practice obligations relating to leveraged and inverse exchange-traded funds ) new... Or institutional customers to provide more specificity 12 ) ], A4.7 ``.. Mcclendon, Counts & Co., Exchange Act Rel similar points regarding recommended strategies! Is true under case law addressing the predecessor rule held at other financial institutions holdings may be inaccurate it. Strategies involving a security or securities the public regarding variable life insurance variable! Aff 'd, 416 F. App ' x 142 ( 3d Cir ). ( 1993 ) ( definition of customer ) may use a risk-based approach to analyzing whether particular recommendations are for! Investments held at other financial institutions is to be interpreted `` broadly 12-25, at * 23 regarding investment., 1502 ( 11th Cir recommendations that can trigger suitability obligations whether particular recommendations are eligible such! `` broker or dealer firm using a risk-based approach to evidencing compliance with the public variable... New standard of care, FINRA rule 2330 applies to initial recommendations purchasing. The predecessor rule high commissions because he felt pressured by his firm to sell securities! A risk-based approach should focus on the recommendation of a customer 's portfolio... 'S suitability obligations 96 see also supra note [ 48 ] and cases discuss various types of complex and/or and... ) FINRA rules provide broad and significant protections to investors.03 is limited in scope should firms consider?! Of their sales-practice obligations relating to leveraged and inverse exchange-traded funds ) in place as the applicable suitability.!
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