The new FINRA rule 2111 clarifies the suitability standard as follows:
1. It codifies the three main suitability obligations requiring brokers to (i) perform due diligence to understand the risks of an investment or investment strategy, and determine whether it is suitable for anyone, (ii) have a reasonable basis for believing the investment or investment strategy is suitable for the particular customer based on that customer's investment profile; and (iii) have a reasonable basis for believing that a series of securities transactions are not excessive (if the broker has control over the account).
2. It expands the factors that brokers must consider when making recommendations to customers to include age, investment experience, time horizon, liquidity needs, and risk tolerance, as well as other factors.
3. It covers recommendations of investment strategies (not just securities transactions), which it defines broadly to include recommendations to "hold" (or refrain from selling) a security, even one that the broker did not make the original recommendation to purchase.
In Regulatory Notice 12-25 (captioned "Suitability - Additional Guidance on FINRA's New Suitability Rule"), FINRA further explicitly reaffirms that "a broker's recommendation must be consistent with his customer's best interests," and that this "prohibits a broker from placing his or her interests ahead of the customer's interests." The hallmark of a fiduciary is the requirement to always put the client's interests first. Thus, according to FINRA, brokerage firms and their registered representatives are subject to a fiduciary standard of care when they recommend an investment or investment strategy.
Regulatory Notice 12-25 also clarifies that the term "customer" includes a potential customer or anyone with whom the firm has even an informal business relationship, even if that person does not have an account at the firm. An investor takes a huge risk when cashing in pension assets on the advice of a broker, which is often before the investor has opened an account with the firm. Thus FINRA's own written guidance debunks the argument that the firm owed no duty under those circumstances because the investor was "not a customer."
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
1. It codifies the three main suitability obligations requiring brokers to (i) perform due diligence to understand the risks of an investment or investment strategy, and determine whether it is suitable for anyone, (ii) have a reasonable basis for believing the investment or investment strategy is suitable for the particular customer based on that customer's investment profile; and (iii) have a reasonable basis for believing that a series of securities transactions are not excessive (if the broker has control over the account).
2. It expands the factors that brokers must consider when making recommendations to customers to include age, investment experience, time horizon, liquidity needs, and risk tolerance, as well as other factors.
3. It covers recommendations of investment strategies (not just securities transactions), which it defines broadly to include recommendations to "hold" (or refrain from selling) a security, even one that the broker did not make the original recommendation to purchase.
In Regulatory Notice 12-25 (captioned "Suitability - Additional Guidance on FINRA's New Suitability Rule"), FINRA further explicitly reaffirms that "a broker's recommendation must be consistent with his customer's best interests," and that this "prohibits a broker from placing his or her interests ahead of the customer's interests." The hallmark of a fiduciary is the requirement to always put the client's interests first. Thus, according to FINRA, brokerage firms and their registered representatives are subject to a fiduciary standard of care when they recommend an investment or investment strategy.
Regulatory Notice 12-25 also clarifies that the term "customer" includes a potential customer or anyone with whom the firm has even an informal business relationship, even if that person does not have an account at the firm. An investor takes a huge risk when cashing in pension assets on the advice of a broker, which is often before the investor has opened an account with the firm. Thus FINRA's own written guidance debunks the argument that the firm owed no duty under those circumstances because the investor was "not a customer."
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
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