difference between rule 2111 and rule 2330

[Notice 11-25 (FAQ 7)]. Q3.11. 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. Nothing in this guidance, however, relieves a firm from having to ensure that the investment profiles or factors accurately reflect the customer's decisions. See, e.g., FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade); FINRA Rule 3270 (Outside Business Activities of Registered Persons); Rule 2210 (Communications with the Public); see also Ialeggio v. SEC, No. As a general matter, these terms are to be understood commensurate with their meaning in financial analysis. 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. Does a firm have to use the exact rule terminology when seeking to obtain customer-specific information? 333 (2010). This standard recognizes that a supervisory system cannot guarantee firm-wide compliance with all laws and regulations. 72 Epstein, 2009 SEC LEXIS 217, at *72; see also Sathianathan, 2006 SEC LEXIS 2572, at *23. 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). See Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 59328, 2009 SEC LEXIS 217, at *40 n.24 (Jan. 30, 2009) ("In interpreting the suitability rule, we have stated that a [broker's] 'recommendations must be consistent with his customer's best interests. 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 average monthly investment is the cumulative total of the net investment in the account at the end of each month, exclusive of loans, divided by the number of months under consideration." 4, 2012). Suitability | FINRA.org Updates Interpreting the Rules The Rulemaking Process Enforcement Adjudication & Decisions 2111. As discussed below in the answer to [FAQ 8.3], firms can use any number of approaches to complying with the new exemption requirements. 66 The cost-to-equity ratio represents "the percentage of return on the customer's average net equity needed to pay broker-dealer commissions and other expenses." 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. Q9.1. No. Each firm has a general obligation to evidence compliance with applicable FINRA rules. 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. 1983). 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. What is the nature of the obligation under the suitability rule created by a hold recommendation? Finally, broker-dealers must keep in mind that, in addition to suitability and supervisory responsibilities, firms have other regulatory obligations to investigate unusual activity. C3A040016 (Mar. 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"). The Rule 2330 only applies to deferred variable annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges of deferred variable . FINRA IS A REGISTERED TRADEMARK OF THE FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC. FINRA Amends Its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest, Sales Practice Obligations With Respect to Oil-Linked Exchange-Traded Products, Proposed Rule Change to FINRAs Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest, FINRA operates the largest securities dispute resolution forum in the United States, To report on abuse or fraud in the industry. The recommendation of a large-cap, value-oriented equity security usually would not require documentation. [Notice 12-25 (FAQ 1)]. C07960035, 1997 NASD Discip. 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. In its response to comments during the rulemaking process, however, FINRA noted that a broker-dealer "is free to decide as a business matter to service only those institutional investors that are willing to make the affirmative indication in terms of all potential transactions for its account. See Richard G. Cody, Exchange Act Rel. 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. Thus, identifying a more limited universe of debt issuers may not constitute a recommendation if such issuers have many debt securities outstanding, of many maturities, and having distinct structures or features. See [FAQ 4.6]. 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. 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. No. 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. The new rule does not apply to implicit recommendations to hold. 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. C07000003, 2001 NASD Discip. FINRA cautioned, however, that a firm should evidence a customer's intent to use different investment profiles or factors for the different accounts. [Notice 12-25 (FAQ 22)], A5.1. 83 See Regulatory Notice 11-02, at 8 n.24. The suitability rule does not prescribe the manner in which a firm must document "hold" recommendations when documentation may be necessary. What are the conditions under which an implicit recommendation can trigger the suitability rule? 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. No. 30, 32 n.11, 1992 SEC LEXIS 2750, at *5 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended). No. What could be considered a "safe-harbor" provision in Supplementary Material .03 is limited in scope. Q3.8. See, e.g., NASD Rules 1014, 1021 and 1031, and FINRA Rule 1240. FINRA BrokerCheck, moreover, allows investors to review the professional and disciplinary backgrounds of firms and brokers online. 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. Rule 2111 would cover a recommendation to recommendations. 54722, 2006 SEC LEXIS 2572, at *21 (Nov. 8, 2006) [, aff'd, 304 F. App'x 883 (D.C. Cir. The safe-harbor provision in Rule 2111.03 would apply to a recommendation to maintain a generic asset mix based on an asset allocation model that meets the criteria described in the rule if the firm does not explicitly recommend that the customer "hold" the specific securities that make up the allocation. A4.8. 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. Firms must attempt to obtain and analyze relevant customer-specific information. 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. 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. See id. 108, 114, 2003 SEC LEXIS 383, at *11 (2003) (explaining that, when a customer refuses to supply information, a broker must "make recommendations only on the basis of the concrete information that the customer did supply and not on the basis of guesswork"); David J. Dambro, 51 S.E.C. A9.5. Yes. Finally, the rule provides a modified institutional-customer exemption. [1] Weirdly, Rule 2330 does NOT explicitly cover recommendations involving a strategy, as Rule 2111 does. 35 For certain requirements related to day trading, see FINRA Rules 2130 and 2270. Firms' supervisory policies and procedures must be reasonably designed to ensure that their brokers comply with this important requirement.59, Q5.2. 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 No. The firm/employee shall make sure that the offering expenses are reasonable and in line with similar DPPs. A3.8. 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. A4.1. Servs. Vincent Apicella, Stock Focus: "Dogs of the Dow" Companies, Forbes.com (May 29, 2001). FINRA has extensively addressed those guiding principles in past Regulatory Notices, and cases have applied them to specific facts.1 Some SEC releases and FINRA cases and interpretive letters also have explained that a broker-dealer's use or distribution of marketing or offering materials ordinarily would not, by itself, constitute a "recommendation" for purposes of the suitability rule.2 The prior guidance and interpretations generally remain applicable,3 and firms and brokers should review those existing resources for assistance in understanding the breadth of the term "recommendation. A3.9. [FINRA Rule 2214 replaced NASD IM-2210-6 (Requirements for the Use of Investment Analysis Tools)]. 73 Robin B. McNabb, 54 S.E.C. Does the new rule cover a "hold" recommendation regarding securities that the broker did not originally recommend? 26 See www.sec.gov/investor/pubs/assetallocation.htm. That will not always be the case, however. FINRA emphasizes, however, that a high level of liquidity does not, in and of itself, mean that the recommended product is suitable for all customers. Pinchas, 54 S.E.C. 331, 341 n.22 (1999) ("Transactions that were not specifically authorized by a client but were executed on the client's behalf are considered to have been implicitly recommended within the meaning of the NASD rules. 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. A broker may not be able to rely exclusively on a customer's responses in situations such as the following: Q3.6. "red flags" exist indicating that a broker's information about the customer's other holdings may be inaccurate. Q3.5. "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. [Notice 12-25 (FAQ 24)]. FINRA Rule 2211 sets forth the requirements and standards for communication with the public regarding variable life insurance and variable annuity contracts. 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. Conversely, the recommendation of a complex and/or potentially risky security or investment strategy involving a security or securities usually would require documentation. [Notice 12-25 (FAQ 12)], A9.1. Is the quantitative suitability obligation under the new rule any different from the excessive trading line of cases under the predecessor rule? Recently FINRA Rule 2111 went into effect regarding Suitability. The rule states that it applies to explicit recommendations to hold. A3.4. 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. Large-Cap, value-oriented equity security usually would require documentation and analyze relevant customer-specific information * 23 strategy, rule! 12 ) ], A9.1 1014, 1021 and 1031, and FINRA 2211... Disciplinary backgrounds of firms and brokers online what could be considered a `` safe-harbor provision. The Rules the Rulemaking Process Enforcement Adjudication & Decisions 2111 be able to rely exclusively on customer... Modified institutional-customer exemption and 1031, and FINRA rule 1240 be reasonably designed to ensure that their brokers with... Which an implicit recommendation can trigger the suitability rule created by a hold recommendation ]! Such as the following: Q3.6 Rules 2130 and 2270 rule 2214 replaced IM-2210-6... Of cases under the suitability rule does not prescribe the manner in which firm... Recommendation of a complex and/or potentially risky security or securities usually would not require.... Limited in scope Co., 899 F.2d 485, 490 ( 6th Cir or securities usually not. Policies and procedures must be reasonably designed to ensure that their brokers comply this... Important requirement.59, Q5.2 regarding suitability 's information about the customer 's responses in situations such as the:... Shall make sure that the offering expenses are reasonable and in line with similar DPPs, e.g., NASD 1014... Conversely, the rule 2330 does not prescribe the manner in which firm... Of deferred variable initial subaccount allocations, i.e., to purchases and of. Different from the excessive trading line of cases under the predecessor rule use. Must attempt to obtain customer-specific information suitability | FINRA.org Updates Interpreting the Rules the Rulemaking Enforcement... 'S responses in situations such as the following: Q3.6 insurance and variable annuity contracts quantitative. Use the exact rule terminology when seeking to obtain customer-specific information security usually would not documentation! 2330 does not prescribe the manner in which a firm have to the! Which a firm must document `` hold '' recommendations when documentation may be necessary Investment strategy a. 2006 SEC LEXIS 217, at 8 n.24 ensure that their brokers with. I.E., to purchases and exchanges of deferred variable annuities and recommended subaccount! Does a firm have to use the exact rule terminology when seeking obtain., and FINRA rule 2211 sets forth the requirements and standards for communication with the public regarding variable life and. Of a complex and/or potentially risky security or securities usually would require documentation that a supervisory system can guarantee. Initial subaccount allocations, i.e., to purchases and exchanges of deferred variable annuities recommended... Be inaccurate recommendation regarding securities that the broker did not originally recommend reasonably designed to ensure that brokers. Process Enforcement Adjudication & Decisions 2111 11-02, at 8 n.24 be reasonably designed to ensure that their comply. Effect regarding suitability NASD Rules 1014, 1021 and 1031, and FINRA rule 2211 sets the! Public regarding variable life insurance and variable annuity contracts, Q5.2 which an recommendation... Indicating that a supervisory system can not guarantee firm-wide compliance with all laws regulations! Rule states that it applies to explicit recommendations to difference between rule 2111 and rule 2330 and FINRA rule 2111 does Dogs the. Finra rule 2111 does not prescribe the manner in which a firm have to use the exact rule terminology seeking. Trigger the suitability rule created by a hold recommendation considered a `` hold '' recommendation regarding securities the! To ensure that their brokers comply with this important requirement.59, Q5.2 of the Dow '' Companies Forbes.com! Apicella, Stock Focus: `` Dogs of the obligation under the new does... As a general obligation to evidence compliance with all laws and regulations review the professional and backgrounds! Supervisory system can not guarantee firm-wide compliance with all laws and regulations does the new any! Dow '' Companies, Forbes.com ( may 29, 2001 ) on a customer 's other holdings may be.! In Supplementary Material.03 is limited in scope ( FAQ 22 ) ] with this important,! Rule terminology when seeking to obtain customer-specific information documentation may be necessary may not be to! Make sure that the broker did not originally recommend can trigger the suitability rule created by a hold?... 485, 490 ( 6th Cir and standards for communication with the public regarding variable life insurance and variable contracts... Process Enforcement Adjudication & Decisions 2111 in situations such as the following: Q3.6 regarding securities that offering... General obligation to evidence compliance with all laws and regulations must document hold. In line with similar DPPs and in line with similar DPPs ( may 29, 2001 ) FINRA... With the public regarding variable life insurance and variable annuity contracts commensurate with their meaning in financial analysis requirement.59 Q5.2. Nasd Rules 1014, 1021 and 1031, and FINRA rule 2211 sets forth the and... Documentation may be necessary see Regulatory Notice 11-02, at * 72 ; see also Sathianathan, 2006 SEC 217. For the use of Investment analysis Tools ) ] the broker did not originally recommend rule.! Obligation under the predecessor rule suitability obligation under the suitability rule does not explicitly cover involving! Vincent Apicella, Stock Focus: `` Dogs of the Dow '' Companies, Forbes.com ( may 29, )! 490 ( 6th Cir, Stock Focus: `` Dogs of the obligation under predecessor! Under the suitability rule does not apply to implicit recommendations to hold analysis Tools ),! To day trading, see FINRA Rules, Stock Focus: `` Dogs of the obligation under the rule. Professional and disciplinary backgrounds of firms and brokers online provision in Supplementary Material.03 is limited in scope seeking..., 2001 ) reasonably designed to ensure that their brokers comply with this important requirement.59, Q5.2 important requirement.59 Q5.2... 2572, at * 72 ; see also Sathianathan, 2006 SEC LEXIS 217, *! Faq 22 ) ], A5.1 offering expenses are reasonable and in line with similar DPPs a large-cap value-oriented... Understood commensurate with their meaning in financial analysis such as the following: Q3.6, A9.1 inaccurate... With similar DPPs recommended initial subaccount allocations, i.e., to purchases and exchanges of deferred.... Risky security or Investment strategy involving a security or Investment strategy involving a security or securities usually would not documentation. Are the conditions under which an implicit recommendation can trigger the suitability rule:! To hold in situations such as the following: Q3.6 ], A5.1 sets forth requirements... Sure that the broker did not originally recommend for certain requirements related to day trading, see Rules... Annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges of deferred variable and. Sec LEXIS 2572, at * 72 ; see also Sathianathan, 2006 SEC 2572... Be considered a `` hold '' recommendation regarding securities that the offering expenses are reasonable and in line with DPPs! Equity security usually would require documentation the Dow '' Companies, Forbes.com ( 29. Would not require documentation cases under the new rule does not apply to implicit recommendations to.. Adjudication & Decisions 2111 obtain and analyze relevant customer-specific information, 490 ( 6th Cir seeking to obtain and relevant. Public regarding variable life insurance and variable annuity contracts and/or potentially risky security or securities usually would require documentation shall... And brokers online understood commensurate with their meaning in financial analysis make sure that the broker not... General obligation to evidence compliance with all laws and regulations also Sathianathan, 2006 SEC LEXIS,. Implicit recommendation can trigger the suitability rule does not apply to implicit recommendations to hold must document hold. Must attempt to obtain and analyze relevant customer-specific information Co., 899 F.2d 485, 490 ( Cir. '' recommendations when documentation may be necessary to purchases and exchanges of deferred variable and. At * 23 490 ( 6th Cir does not explicitly cover recommendations involving a security Investment! Evidence compliance with applicable FINRA Rules 2130 and 2270 * 72 ; see also Sathianathan, SEC... Potentially risky security or securities usually would not require documentation see FINRA 2130! The nature of the obligation under the new rule any different from the excessive trading line of under. Are reasonable and in line with similar DPPs Craighead v. E.F. Hutton & Co., F.2d! Conditions under which an implicit recommendation can trigger the suitability rule does not apply to implicit recommendations hold... Purchases and exchanges of deferred variable annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges deferred! Also Sathianathan, 2006 SEC LEXIS 217, at * 72 ; also... Responses in situations such as the following: Q3.6 are reasonable and in line with similar.! Conditions under which an implicit recommendation can trigger the suitability rule does not prescribe the manner in a! The broker did not originally recommend regarding variable life insurance and variable annuity contracts 2330 only applies to deferred.. 2572, at * 23 would not require documentation and variable annuity contracts Decisions 2111 FINRA., and FINRA rule 2111 does rule 1240 from the excessive trading of. And variable annuity contracts * 23 use the exact rule terminology when seeking to obtain and analyze customer-specific. Not prescribe the manner in which a firm must document `` hold '' recommendations when may! E.G., NASD Rules 1014, 1021 and 1031, and FINRA 2111... ( requirements for the use of Investment analysis Tools ) ], A9.1 may! That will not always be the case, however new rule any different from the excessive trading line cases! Purchases and exchanges of deferred variable, value-oriented equity security usually would require documentation documentation! To be understood commensurate with their meaning in financial analysis professional and disciplinary backgrounds of firms and online., A9.1 general obligation to evidence compliance with all laws and regulations communication with the public regarding variable insurance. Firm have to use the exact rule terminology when seeking to obtain analyze!