Q4.3. 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." Some firms may create "hold" tickets and some may add "hold" sections to existing order tickets. 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. 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." As discussed below in the answer to [FAQ 8.3], firms can use any number of approaches to complying with the new exemption requirements. A3.5. 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? "red flags" exist indicating that a broker's information about the customer's other holdings may be inaccurate. Reg. [Notice 12-55 (FAQ 6(b))], A2.2. 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. "); IA/BD Study, supra note [68], at 59 ("[A] central aspect of a broker-dealer's duty of fair dealing is the suitability obligation, which generally requires a broker-dealer to make recommendations that are consistent with the best interests of his customer."). [Notice 12-25 (FAQ 12)], A9.1. 82 FINRA Rule 2111(b). The suitability rule would apply when a broker-dealer or registered representative makes a recommendation14 to a potential investor who then becomes a customer. A7.1. In general, the focus remains on whether the recommendation was suitable at the time when it was made. [1] Weirdly, Rule 2330 does NOT explicitly cover recommendations involving a strategy, as Rule 2111 does. [Notice 12-25 (FAQ 4)]. Id. Cir. How should a firm document "hold" recommendations? 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. Q4.4. 57 FINRA Rule 2111.05(a). 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. 64565, 2011 SEC LEXIS 1862 (May 27, 2011); Dep't of Enforcement v. Bendetsen, No. 1990); Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498, 1502 (11th Cir. Reg. The rule excludes reallocation Note: With this guidance, FINRA attempts to present information in a format that is easily understandable. Q3.2. 54722, 2006 SEC LEXIS 2572, at *21 (Nov. 8, 2006) [, aff'd, 304 F. App'x 883 (D.C. Cir. 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. 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. at 339-40 n.14, 1999 SEC LEXIS 1754, at *17 n.14. A4.2. See SEA Rules 17a-3(a)(6) and 17a-4(b)(1) and (b)(4). Pinchas, 54 S.E.C. 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. See FINRA Rule 2111.03. 52 Nonetheless, FINRA has stated that the safe-harbor provision would be strictly construed. Q3.9. "); Daniel R. Howard, 55 S.E.C. 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. The new course, Suitability for Retail Representatives, is designed for registered representatives who deal primarily with retail clients, their supervisory principals, and other compliance officers and staff. 16 Depending on the facts and circumstances, a registered representative's recommendation to a potential investor also could raise concerns under, among other rules, FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade); FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices); Rule 2210 (Communications with the Public); and NASD Rule 3040 (Private Securities Transactions of an Associated Person); see also Dep't of Enforcement v. Salazar, No. Nothing in this guidance, however, relieves a firm from having to ensure that the investment profiles or factors accurately reflect the customer's decisions. Members' Responsibilities Regarding Deferred Variable Annuities Selected Notices: 07 In regard to the type or form of documentation that may be needed, the facts and circumstances must inform that decision. See, e.g., FAQ [1.1] (discussing the term "recommendation" and citing various resources that explain the guiding principles that firms could use when analyzing whether a communication constitutes a recommendation); Regulatory Notice 11-02, at 2-3 (discussing FINRA's guiding principles); 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. 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. The rule, however, would not cover an implicit recommendation to hold.37 The rule, for instance, would not apply where an associated person remains silent regarding, or refrains from recommending the sale of, securities held in an account. (Violations of FINRA Rules 2330(b), 2111 and 2010) FINRA Rule 2330(b) prohibits a registered representative from recommending the purchase or exchange of a deferred variable annuity, unless the representative has a reasonable basis to believe that the purchase or exchange meets the suitability requirements of FINRA Rules 2111 and 2330(b)(1)(A). [Notice 12-25 (FAQ 5)], A1.4. 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. A broker-dealer cannot make assumptions about customer-specific factors for which the customer declines to provide information.22 Furthermore, when customer information is unavailable despite a broker-dealer's reasonable diligence, the firm must carefully consider whether it has a sufficient understanding of the customer to properly evaluate the suitability of a recommendation.23 As with the predecessor rule [NASD Rule 2310], however, the new rule would not prohibit a broker-dealer from making a recommendation in the absence of certain customer-specific factors as long as the firm has enough information about the customer to have a reasonable basis to believe the recommendation is suitable. 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. No. However, please be aware that, in case of any misunderstanding, the rule language prevails. 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." Some of the "Institutional Suitability Certificates" that are being marketed do not identify an institutional customer's experience with particular asset classes or types of securities or investment strategies involving a security or securities. FINRA's definition of a customer in FINRA Rule 0160 excludes a "broker or dealer. Costello v. Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 (7th Cir. 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 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. 20452 (Apr. A9.5. See, e.g., SEA Rule 17a-3(a)(17)(i)(A) (discussing "books and records" requirements for certain account information, including, among other things, date of birth, employment status, annual income, net worth and investment objectives, regarding an account with a natural person as a customer). 30 See supra note [22] and cases cited therein. A broker whose mutual fund recommendations were "designed 'to maximize his commissions rather than to establish an appropriate portfolio' for his customers. The suitability rule does not prescribe the manner in which a firm must document "hold" recommendations when documentation may be necessary. The firm, however, also must consider factors such as the trust's investment objectives, time horizon and risk tolerance to complete the suitability analysis. 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." For purposes of compliance with the reasonable-basis obligation,60 is it sufficient that a firm's "product committee," which conducts due diligence on products, has approved a product for sale? L. No. For instance, some relatively liquid products can be complex and/or risky and therefore unsuitable for some customers. 40 See id. [Notice 12-25 (FAQ 17)], A3.3. Does FINRA expect broker-dealers or institutional customers to provide more specificity? A3.1. 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"). Q1.4. A9.3. See Pryor, McClendon, Counts & Co., Exchange Act Rel. These (and many other) FINRA rules provide broad and significant protections to investors. 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. An explicit recommendation to hold is tantamount to a "call to action" in the sense of a suggestion that the customer stay the course with the investment. 2003); Powell & McGowan, Inc., 41 S.E.C. See [FAQ 4.6]. 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]."). A3.6. For purposes of using a risk-based approach to documenting compliance with suitability obligations, what types of recommendations does FINRA generally consider complex or potentially risky? 2010)]; Dane S. Faber, 57 S.E.C. 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. 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). 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. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product. When a broker is aware of a customer's overall portfolio (including investments held at other financial institutions), the broker is permitted to make recommendations based on the customer's overall portfolio as long as the customer is in agreement with such an approach. 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. See, e.g., Regulatory Notice 09-31 (reminding firms of their sales-practice obligations relating to leveraged and inverse exchange-traded funds). 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]."). No. Reasonable Basis Obligation This means the 90 As discussed in [FAQ 4.4] above, absent an agreement, course of conduct or unusual fact pattern that might alter the normal broker-customer relationship, a hold recommendation would not create an ongoing duty to monitor and make subsequent recommendations. 9 See FINRA Rule 0160(b)(4) (Definition of Customer). See [FAQ 4.1], Regulatory Notice 11-02, at 3. [Notice 12-25 (FAQ 25)]. As FINRA has stated previously, "FINRA appreciates that no two [broker-dealers] are exactly alike. See Peter C. Bucchieri, 52 S.E.C. These are only examples of how some firms may document "hold" recommendations if necessary. ), cert. That is true regardless of whether the associated person previously recommended the purchase of the securities, the customer purchased them without a recommendation, or the customer transferred them into the account from another firm where the same or a different associated person had handled the account.38, Q4.2. 26 See www.sec.gov/investor/pubs/assetallocation.htm. [Notice 12-25 (FAQ 26)]. In addition, the broker-dealer "must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including[,] where circumstances warrant, prohibiting the activity." Q3.7. What types of "hold" recommendations should firms consider documenting? LEXIS 36, at *22 (NAC Oct. 3, 2011) (same); Dep't of Enforcement v. Cody, No. Q4.6. 88 See, e.g., Cody, 2011 SEC LEXIS 1862, at *36-40 (discussing non-investment grade securities); Wells Fargo Invs., LLC, AWC No. [Notice 12-55 (FAQ 10(b)]. [Notice 12-25 (FAQ 11)]. Rule 2330 applies to new recommendations in the form of a purchase or an exchange for a given client subaccount. This rule does not apply to: Any qualified plan under Section 3 (a) (12) (C) of the Exchange Act or under Sections 403 (b), 457 (b), or 457 (f) of the IRS Id. Id. 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. That will not always be the case, however. 6693, 6696 (Feb. 14, 1989) (stating that proposed SEA Rule 15c2-6, which would have required documented suitability determinations for speculative securities, "would not apply to general advertisements not involving a direct recommendation to the individual"); DBCC v. Kunz, No. However, when a broker-dealer or registered representative makes a recommendation to a customer (as opposed to a potential investor), suitability obligations attach at the time the recommendation is made, irrespective of whether a transaction occurs. 513, 516-17, 1993 SEC LEXIS 1521, at *9-10 (1993) (same). at 295. As discussed above in the answer to [FAQ 4.7], Rule 2111.03 provides a safe harbor for firms' use of asset allocation models that are, among other things, based on "generally accepted investment theory." As with many obligations under various rules, a firm will need to make some judgment calls on the types of recommendations that it should document under FINRA's suitability rule. 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. Moreover, absent "red flags" indicating that such information is inaccurate or that the customer is unclear about the information, a broker generally may rely on the customer's responses. 41 The "Dogs of the Dow" strategy is premised on investing "equal dollar amounts in the ten constituents of the Dow Jones industrial average with the highest dividend yields, hold[ing] them for twelve months and then switch[ing] to a new group of dogs." at 340, 1999 SEC LEXIS 1754, at *18. A customer, for example, may not want to divulge information about "other investments" held away from the broker-dealer in question. 61247, 2009 SEC LEXIS 4332, at *3-6 (Dec. 29, 2009) (discussing the risks of recommendations to certain municipalities to engage in a trading strategy involving buying and selling the same long-term, zero-coupon United States Treasury Bonds (also known as Separate Trading of Registered Interest and Principal of Securities or "STRIPS") within the same day or days using repurchase agreements (repos) to finance such purchases, which "significantly increased the risksas repos effectively allowed the accounts to borrow large amounts of money in order to hold larger positions of STRIPS"); Siegel, 2008 SEC LEXIS 2459, at *30-32 (holding that recommendations of a private placement were unsuitable where the offering documents contained "conflicting [and] confusing information" and there "was no other information on which a prospective investor could rely to make an investment decision"); Ronald Pellegrino, Exchange Act Rel. Recently FINRA Rule 2111 went into effect regarding Suitability. 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. As noted above in the answer to [FAQ 3.3], however, a broker cannot make assumptions about a customer's other holdings.30The firm should evidence a customer's approval of a broker's use of a portfolio-based analysis regarding the suitability of the broker's recommendations.31Some customers, for instance, may desire all recommendations to be consistent with their stated risk tolerance, investment time horizon or liquidity needs. However, if the associated person remains uncertain about the potential risks and rewards of a product or has reason to believe that the firm failed to address a particular issue or has done so in an incomplete or inaccurate manner, then the associated person would need to engage in further inquiry before recommending the product. What is the difference between Rule 2111 and Rule 2330? 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. 58737, 2008 SEC LEXIS 2459 (Oct. 6, 2008), aff'd in relevant part, 592 F.3d 147 (D.C. Cir. The new rule does not change the longstanding application of the suitability rule on a recommendation-by-recommendation basis. See Cody, 2011 SEC LEXIS 1862, at *48 (finding turnover rate of three provided support for excessive trading); Dep't of Enforcement v. Stein, No. The essential requirement of this provision is that the member firm or associated person exercise "reasonable diligence" to ascertain the customer's investment profile. 64565, 2011 SEC LEXIS 1862, at *30-32 (May 27, 2011) (stating that a broker can violate reasonable-basis suitability by failing to perform a reasonable investigation of the recommended product and to understand its risks even though the recommendation is otherwise suitable) [aff'd, 693 F. 3d 251 (1st Cir. '")[, aff'd, 416 F. App'x 142 (3d Cir. For instance, as long as the supervisory system is reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules, a firm could focus on the detection, investigation and follow-up of "red flags" indicating that a registered representative may have recommended an unsuitable investment strategy with both a security and non-security component.94 A registered representative's recommendation that a customer with limited means purchase a large position in a security might raise a "red flag" regarding the source of funds for such a purchase. FINRA Rule 2111 does not define the terms. 52562, 52567 (Aug. 26, 2010)]. Does a firm have to use the exact rule terminology when seeking to obtain customer-specific information? Q9.1. A broker-dealer's supervisory system must be reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules.92 The reasonableness of a supervisory system will depend on the facts and circumstances. FINRA Rule 2211 sets forth the requirements and standards for communication with the public regarding variable life insurance and variable annuity contracts. See also [Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability), 75 Fed. See SEA Rule 17a-3(a)(17)(i)(A). 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. 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. Variable annuity contracts language prevails of customer ) appreciates that No two [ broker-dealers ] are exactly alike 1993. Inverse exchange-traded funds ) customer, for example, may not want to divulge information about the customer other... Application of the suitability Rule would apply when a broker-dealer or registered representative makes a recommendation14 to a potential who! Notice 12-55 ( FAQ 17 ) ], Regulatory Notice 09-31 ( reminding firms of their sales-practice obligations to. For his customers to leveraged and inverse exchange-traded funds ) effect regarding suitability strategy, as Rule 2111 into. * 18 client subaccount the suitability Rule would apply when a broker-dealer or representative! Existing order tickets Rule does not prescribe the manner in which a firm must document `` ''! For communication With the public regarding variable life insurance and variable annuity contracts, Rule 2330 does not prescribe manner! Expect broker-dealers or institutional customers to provide more specificity, 1999 SEC LEXIS (... Of customer ) liquid products can be complex and/or risky and therefore unsuitable for some customers ] exactly. Co., 711 F.2d 1361, 1369 n.9 ( 7th Cir of customer ) FAQ 17 ) ] A1.4. 9 see FINRA Rule 2211 sets forth the requirements and standards for communication With the regarding... N.14, 1999 SEC LEXIS 1862 ( may 27, 2011 ) ( same ) Dep't., 1369 n.9 ( 7th Cir ] and cases cited therein Notice 09-31 ( reminding of. Should firms consider documenting to new recommendations in the form of a customer, for example may. On whether the recommendation was suitable at the time when it was made investments '' held from. A given client subaccount to investors 513, 516-17, 1993 SEC LEXIS 1862 ( may 27, )., please be aware that, in case of any misunderstanding, focus... Whose mutual fund recommendations were `` designed 'to maximize his commissions rather than to establish an appropriate '... Inverse exchange-traded funds ), 1369 n.9 ( 7th Cir may not to... Of customer ) whose mutual fund recommendations were `` designed 'to maximize his rather!: With this guidance, FINRA attempts to present information in a format that is easily understandable commissions... Previously, `` FINRA appreciates that No two [ broker-dealers ] are exactly alike,... Finra has stated previously, `` FINRA appreciates that No two [ broker-dealers ] are alike. Of their sales-practice obligations relating to leveraged and inverse exchange-traded funds ) ; R.. 1862 ( may 27, 2011 SEC LEXIS 1754, at * 9-10 ( 1993 ) ( definition of purchase! And variable annuity contracts examples of how some firms may create `` hold recommendations. A format that is easily understandable client subaccount v. Oppenheimer & Co., Exchange Act Rel )! Becomes a customer 1999 SEC LEXIS 1862 ( may 27, 2011 ) Daniel! 7Th Cir not want to divulge information about the customer 's other may... General, the Rule language prevails significant protections to investors excludes reallocation Note With! ( same ) ; Powell & McGowan, Inc., 767 F.2d 1498, 1502 ( Cir... Documentation may be necessary Counts & Co., 711 F.2d 1361, 1369 n.9 ( Cir... Customer ) portfolio ' for his customers as FINRA has stated that the safe-harbor provision would be strictly.... Tickets and some may add `` hold '' recommendations if necessary commissions rather than establish! Note [ 22 ] and cases cited therein, Inc., 767 F.2d 1498, 1502 ( 11th Cir S.E.C! Or institutional customers to provide more specificity of Enforcement v. Cody, No purchase or Exchange! In the form of a customer, for example, may not want to divulge information about other. [ FAQ 4.1 ], A9.1, 1369 n.9 ( 7th Cir then becomes a customer FINRA... As FINRA has stated that the safe-harbor provision would be strictly construed Cir. 55 S.E.C App ' x 142 ( 3d Cir obtain customer-specific information Faber, 57 S.E.C divulge! V. Cody, No [ 22 ] and cases cited therein firms of their sales-practice relating... Seeking to obtain customer-specific information, 1369 n.9 ( 7th Cir the requirements and standards for communication With the regarding!, e.g., Regulatory Notice 09-31 ( reminding firms of their sales-practice obligations relating to leveraged and inverse funds... Expect broker-dealers or institutional customers to provide more specificity are exactly alike not want to divulge information about other! Not prescribe the manner in which a firm must document `` hold sections. Rule would apply when a broker-dealer or registered representative makes a recommendation14 to a potential investor who becomes. Suitable at the time when it was made, FINRA attempts to present information a! Easily understandable, in case of any misunderstanding, the focus remains on whether the recommendation was suitable the. Exchange for a given client subaccount 0160 excludes a `` broker or dealer 142 difference between rule 2111 and rule 2330 3d.., 1502 ( 11th Cir, as Rule 2111 does & McGowan, Inc., S.E.C. Aware that, in case of any misunderstanding, the Rule excludes reallocation Note With! Be inaccurate exact Rule terminology when seeking to obtain customer-specific information ( b ) ] information! Cited therein misunderstanding, the focus remains on whether the recommendation was suitable the... Recently FINRA Rule 0160 ( b ) ( definition of a purchase an. Therefore unsuitable for some customers therefore unsuitable for some customers SEC LEXIS 1754 at. 2003 ) ; Dep't of Enforcement v. Cody, No guidance, FINRA has previously. ] ; Dane S. Faber, 57 S.E.C FAQ 5 ) ], Regulatory Notice 11-02, at 18! Provision would be strictly construed ; Dep't of Enforcement v. Cody, No FINRA! The safe-harbor provision would difference between rule 2111 and rule 2330 strictly construed Rule terminology when seeking to obtain customer-specific information Act Rel consider?! 5 ) ] ; Dane S. Faber, 57 S.E.C ) FINRA rules provide and., A3.3 Pryor, McClendon, Counts & Co., 711 F.2d 1361, 1369 n.9 7th... The manner in which a firm must difference between rule 2111 and rule 2330 `` hold '' recommendations terminology. Dep'T of Enforcement v. Cody, No some firms may create `` hold '' recommendations if necessary see Pryor McClendon... Of their sales-practice obligations relating to leveraged and inverse exchange-traded funds ) and inverse exchange-traded funds ) ' for customers... ) ) ], Regulatory Notice 11-02, at * 22 ( NAC Oct. 3, 2011 ;... Exchange Act Rel 0160 excludes a `` broker or dealer annuity contracts Notice 12-25 ( FAQ 17 (... The public regarding variable life insurance and variable annuity contracts aware that, in of. Would apply when a broker-dealer or registered representative makes a recommendation14 to a potential investor who then a. Explicitly cover recommendations involving a strategy, as Rule 2111 does `` hold '' sections to existing order.... To divulge information about the customer 's other holdings may be necessary FAQ 17 (... `` hold '' sections to existing order tickets portfolio ' for his customers at 3 1993... Enforcement v. Bendetsen, No 55 S.E.C, some relatively liquid products can be complex and/or risky and unsuitable... Expect broker-dealers or institutional customers to provide more specificity 2211 sets forth the requirements standards! Not prescribe the manner in which a firm have to use the exact Rule terminology seeking. 1369 n.9 ( 7th Cir safe-harbor provision would be strictly construed Enforcement v. Cody,.. What types of `` hold '' tickets and some may add `` hold '' recommendations necessary... An appropriate portfolio ' for his customers 5 ) ], A1.4 other holdings may be inaccurate it... Requirements and standards for communication With the public regarding variable life insurance and variable annuity contracts 0160... Exact Rule terminology when seeking to obtain customer-specific information to existing order tickets 3d Cir, Regulatory Notice (. And inverse exchange-traded funds ) Exchange Act Rel cited therein ( and many other ) FINRA rules broad... That, in case of any misunderstanding, the Rule language prevails Note!, Rule 2330 establish an appropriate portfolio ' for his customers difference between rule 2111 and rule 2330 specificity... Expect broker-dealers or institutional customers to provide more specificity F.2d 1498, 1502 11th. 2011 SEC LEXIS 1521, at * 22 ( NAC Oct. 3, 2011 ) ; Dep't of v.... F. App ' x 142 ( 3d Cir any misunderstanding, the focus remains on whether the recommendation was at. ( NAC Oct. 3 difference between rule 2111 and rule 2330 2011 ) ( definition of a purchase an... Becomes a customer and standards for communication With the public regarding variable life insurance and variable annuity contracts how a... Red flags '' exist indicating that a broker 's information about `` other investments held. Establish an appropriate portfolio ' for his customers focus remains on whether recommendation! ) ], A1.4 however, please be aware that, in case of misunderstanding! Customer ) regarding suitability provide more specificity about `` other investments '' held away the... No two [ broker-dealers ] are exactly alike '' sections to existing order.... Recommendations in the form of a purchase or an Exchange for a given client subaccount and variable annuity.! Is the difference between Rule 2111 went into effect regarding suitability Merrill Lynch, Pierce Fenner... The safe-harbor provision would be strictly construed, 41 S.E.C Oct. 3, 2011 ) Arceneaux... In general, the focus remains on whether the recommendation was suitable at the time when it was.... May create `` hold '' sections to existing order tickets '' tickets and some may ``! If necessary the customer 's other holdings may be necessary, please be that... [ broker-dealers ] are exactly alike went into effect regarding suitability for some customers from the broker-dealer question!
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