The date of July 9, 2012, marks the implementation of new FINRA rules governing the suitability requirements of brokers under Rule 2111. While many see this as the first foray into a new set of regulations and harmonization of the true fiduciary standards that RIA’s must meet, these new rules and standards push brokers to a higher degree of accountability in their role working with clients.
The rules are focused on extending the requirements surrounding the duty to provide “suitable” advice to clients on recommendations that are made. While there are numerous issues that are related to the new rules, there are two specific highlights:
1) “Hold Recommendations” and “Investment Strategies” – Under the old rules (Rule 2310), brokers merely needed to ensure that the initial recommendation to buy or sell a certain investment or security was “suitable.” Under the new Rule 2111, additional scrutiny is required as any “call to action” made by a broker must be “suitable.” The implications here are twofold. First, a “call to action” cannot only be just a recommendation to make a purchase of a security, but it can also be deemed to have occurred when a broker recommends a client take a certain action – even if a security sale or purchase is not involved. This means that if a broker recommends that a client take out a reverse mortgage for retirement income purposes, draw on home equity lines available or other such actions, the broker is held to a suitability standard on such recommendations. Second, Rule 2111 deems that a recommendation to “hold” a security or position is, in fact, a recommendation that must be reviewed and deemed suitable under the current circumstances of the client. (For more information on the rule, see the FINRA details on Suitability Rule 2111.)
2) Additional Customer Information Requirements – While every advisor worth their muster has a detailed understanding of their client’s personal and financial situation, the new rules expand the amount of information that a broker should have and use in consideration of whether an investment or recommendation is “suitable.” In the past, NASD Rule 2310(b) required broker-dealers to use “reasonable efforts” obtaining information regarding a customer’s specific investment objectives, financial status, tax status, and other information “considered to be reasonable” in making a recommendation. While there are some exceptions, Rule 2111 expands the required customer data to include:
- The customer’s age
- Other investments held by the customer
- The customer’s financial status and needs
- Tax status
- Investment objectives
- Investment experience
- Investment time horizon, or the expected number of months, years or decades that a customer plans to invest to achieve a particular financial goal
- Liquidity needs, as to the extent to which the customer desires the ability to quickly and easily convert to cash all or a portion of the investment without a loss in value (for lack of a ready market) or a penalty
- Risk tolerance, defined as a customer’s ability and willingness to lose some or all of the customer’s original investment in exchange for higher potential returns
- Any other information the customer may disclose to the member or associated person in connection with such recommendation
For more information on this aspect of the new rules, click here.
While the fiduciary standards that many expect to harmonize the rule that BDs operate under with those more stringent rules that RIAs are subject to have yet to be formalized, these new FINRA rules are a significant step in that direction and will have an impact on how a broker must operate in today’s environment. For more information on fulfilling a true fiduciary standard, including processes and operational characteristics and traits of those that fulfill their fiduciary duties, review the online training program developed by Greene Consulting in conjunction with world-renowned fiduciary expert and author Don Trone HERE.