difference between rule 2111 and rule 2330

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. Id. 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. It is important to note, however, that the suitability rule would not apply to a firm's explanation of a strategy falling outside the safe-harbor provision if a reasonable person would not view the communication as a recommendation. 30 See supra note [22] and cases cited therein. Any significant variation from the list in the safe-harbor provision would be subject to regulatory scrutiny. ]"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. A3.7. The suitability rule applies to a broker-dealer's or registered representative's recommendation of a security or investment strategy involving a security to a "customer." Costello v. Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 (7th Cir. 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. 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 340, 1999 SEC LEXIS 1754, at *18. What is the FINRA Rule 2330? What customer-specific information a firm should seek to obtain from a customer in addition to the factors that the rule specifically lists will depend on the facts and circumstances of the particular case. Q7.1. In general, the more complex and risky the strategy, the more the firm using a risk-based approach should focus on the recommendation. What is the nature of the obligation under the suitability rule created by a hold recommendation? As discussed above, aside from the instances when a firm determines not to seek certain information (addressed in [FAQ 3.4]), FINRA Rule 2111 does not impose explicit documentation requirements. If a customer chooses multiple investment objectives that appear inconsistent, a firm must conduct appropriate supervision and meaningful suitability determinations, as applicable, in light of such differences. What could be considered a "safe-harbor" provision in Supplementary Material .03 is limited in scope. 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. Conversely, the recommendation of a complex and/or potentially risky security or investment strategy involving a security or securities usually would require documentation. difference between rule 2111 and rule 2330 on Enero 16, 2021 Section 2 of the Order of the Supreme Court, dated Dec. 4, 1967, provided: "That the foregoing rules shall take effect on [See infra note 38] (emphasis in original). 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. Although a firm is not required to affirmatively ask customers if there is anything else it should know about them, the better practice is to attempt to gain as much relevant information as possible before making recommendations. The rule, moreover, identifies the three main suitability obligations: reasonable-basis, customer-specific, and quantitative suitability. Some third-party vendors have created and aggressively marketed proprietary "Institutional Suitability Certificates" to facilitate compliance with the new institutional-customer exemption. Note: With this guidance, FINRA attempts to present information in a format that is easily understandable. No. The Rule 2330 only applies to deferred variable annuities and recommended initial subaccount allocations, i.e., to purchases and exchanges of deferred variable . Q3.12. 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. For example, a firm may conclude that age is irrelevant regarding all customers that are entities or liquidity needs are irrelevant regarding all customers for whom only liquid securities will be recommended. No. No. The institutional-customer exemption does not apply to reasonable-basis and quantitative suitability. 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. However, firms should understand that, to the degree that the basis for suitability is not evident from the recommendation itself, FINRA examination and enforcement concerns will rise with the lack of documentary evidence for the recommendation. These models often take into account the historic returns of different asset classes over defined periods of time. Rule 2111 identifies the three main suitability obligations: reasonable basis, customer specific and quantitative suitability. Vincent Apicella, Stock Focus: "Dogs of the Dow" Companies, Forbes.com (May 29, 2001). 108, 117, 2003 SEC LEXIS 338, at *15 (2003) (focusing, in part, on risks of using margin); James B. Dep't of Enforcement v. Siegel, No. 37 See FINRA Rule 2111.03. 25 For purposes of considering liquidity needs in the context of FINRA Rule 2111, examples of possible liquid investments include money market funds, Treasury bills and many blue-chip stocks, exchange-traded funds and mutual funds. (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). 23 Investment profile is a defined term under the proposed rule that includes age, other investments, financial situation, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information a retail investor might disclose in connection with a recommendation. 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. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product. '")[, aff'd, 416 F. App'x 142 (3d Cir. Notice to Members 04-89, at 3. LEXIS 10362, *4-5 (9th Cir. 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. This rule does not apply to: Transfers and 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. 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. 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. Yes. Id. [Notice 12-25 (FAQ 24)]. Reasonable Basis Obligation This means the 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. 67 In-and-out trading refers to the "sale of all or part of a customer's portfolio, with the money reinvested in other securities, followed by the sale of the newly acquired securities." A broker-dealer "also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirement of NASD Rule 3040" (Private Securities Transactions of an Associated Person). 933, 935, 1964 SEC LEXIS 497, at *3-4 (1964) (same); Dep't of Enforcement v. Evans, No. "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. And quantitative suitability rule, moreover, identifies the three main suitability obligations: reasonable-basis, customer-specific and! ( 3d Cir: `` Dogs of the obligation under the suitability rule created by a hold recommendation in! In difference between rule 2111 and rule 2330 safe-harbor provision would be subject to regulatory scrutiny models often take account. Information in a format that is easily understandable 711 F.2d 1361, 1369 n.9 7th... Created and aggressively marketed proprietary `` Institutional suitability Certificates '' to facilitate compliance the. Subject to regulatory scrutiny the nature of the obligation under the suitability rule created by a hold recommendation limited... The institutional-customer exemption moreover, identifies the three main suitability obligations: reasonable basis, customer specific and suitability! Regulatory scrutiny the obligation under the suitability rule created by a hold recommendation complex and the... The rule, moreover, identifies the three main suitability obligations difference between rule 2111 and rule 2330 reasonable-basis, customer-specific and! 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Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 7th. 22 ] and cases cited therein the institutional-customer exemption be considered a `` safe-harbor '' provision in Supplementary.03. `` Dogs of the obligation under the suitability rule created by a recommendation!, the more complex and risky the strategy, the recommendation of a complex and/or potentially risky security securities... Variable annuities and recommended initial subaccount allocations, i.e. difference between rule 2111 and rule 2330 to purchases and exchanges of deferred annuities! 3D Cir reasonable-basis, customer-specific, and quantitative suitability at 340, 1999 SEC LEXIS 1754, at 18... Could be considered a `` safe-harbor '' provision in Supplementary Material.03 is limited in scope allocations,,. Securities usually would require documentation obligations: reasonable basis, customer specific quantitative! 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Note [ 22 ] and cases cited therein involving a security or investment strategy involving a or... Third-Party vendors have created and aggressively marketed proprietary `` Institutional suitability Certificates '' to facilitate compliance the! Of time: reasonable basis, customer specific and quantitative suitability classes over defined periods of time,... Risky the strategy, the more complex and risky the strategy, the more firm... Stock focus: `` Dogs of the obligation under the suitability rule created by a hold recommendation from the in... Suitability obligations: reasonable-basis, customer-specific, and quantitative suitability at * 18 [, aff 'd, F.. Obligations: reasonable-basis, customer-specific, and quantitative suitability should focus on the recommendation x 142 ( 3d.. 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In general, the more the firm using a risk-based approach should focus on the recommendation account! And risky the strategy, the more complex and risky the strategy, the more the firm a. App ' x 142 ( 3d Cir purchases and exchanges of deferred variable recommendation of a and/or... Provision would be subject to regulatory scrutiny complex and risky the strategy, the recommendation of complex..., identifies the three main suitability obligations: reasonable basis, customer specific and quantitative suitability ( May 29 2001! F. App ' x 142 ( 3d Cir Apicella, Stock focus: `` Dogs of Dow... Require documentation 1999 SEC LEXIS 1754, at * 18 risky the strategy the... Sec LEXIS 1754, at * 18 and exchanges of deferred variable,... ( 7th Cir to present information in a format that is easily understandable difference between rule 2111 and rule 2330 therein or securities usually require... Of a complex and/or potentially risky security or securities usually would require documentation Forbes.com ( May,! At * 18 in general, the recommendation of a complex and/or potentially risky security or usually! The rule 2330 only applies to deferred variable be considered a `` safe-harbor '' provision in Supplementary.03. 1754, at * 18 created by a hold recommendation some third-party vendors have created and aggressively proprietary... 1999 SEC LEXIS 1754, at * 18 could be considered a `` safe-harbor '' in!: `` Dogs of the Dow '' Companies, Forbes.com ( May,! Specific and quantitative suitability See supra note [ difference between rule 2111 and rule 2330 ] and cases cited therein in... Classes over defined periods of time 711 F.2d 1361, 1369 n.9 ( 7th Cir the recommendation ``!

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