Please consult the appropriate FINRA Rules. Rule 2330 establishes broker requirements when recommending purchases and exchanges of deferred variable annuities. Under this provision, a member or person associated with a member must determine whether the customer has had such an exchange at the member and must make reasonable efforts to ascertain whether the customer has had an exchange at any other broker-dealer within the preceding 36 months. The cost associated with a recommendation, however, ordinarily is only one of many important factors to consider when determining whether the subject security or investment strategy involving a security or securities is suitable. Cost-to-equity ratios as low as 8.7 have been considered indicative of excessive trading, and ratios above 12 generally are viewed as very strong evidence of excessive trading. A Summary of FINRA Rule 2330. If a firm's call center informs customers that they are permitted to continue to maintain their investments at the firm under such circumstances, would FINRA consider those communications to be "hold" recommendations triggering application of the new suitability rule? These cookies will be stored in your browser only with your consent. Would a broker, for example, be responsible for a hold recommendation involving blue chip stocks that a customer transferred into an account at the broker-dealer? See [FAQ 4.6]. As a result, UBIS violated FINRA Rules 3110(a) and (b), 2330(c), (d), and 2010. C01020025, 2004 NASD Discip. Variable Contracts of an Insurance Company Up 2340. A9.5. Such procedures should address surveillance to help identify misconduct and ways to address instances of inappropriate exchanges. 26 See www.sec.gov/investor/pubs/assetallocation.htm. See Peter C. Bucchieri, 52 S.E.C. "93 A broker-dealer can consider a variety of approaches to identifying and supervising its registered representatives' recommendations of investment strategies involving both a security and a non-security component. 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. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product. "); 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."). She has represented brokerage firms, banks, clearing firms, and associated persons in over 60 arbitrations before the NASD and FINRA which have been tried through award. 7230A. Trade Report Input | FINRA.org A3.1. 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. FINRA and the SEC have recognized that certain actions constitute implicit recommendations that can trigger suitability obligations. [Notice 12-55 (FAQ 6(b))], A2.2. The suitability rule applies only to recommended securities and investment strategies involving securities, but FINRA does not define the term "recommendation" other than to say that it is a facts and circumstances inquiry. Q1.4. See, e.g., Rafael Pinchas, 54 S.E.C. As discussed below in the answer to [FAQ 8.3], firms can use any number of approaches to complying with the new exemption requirements. A4.2. LEXIS 36, at *22 (NAC Oct. 3, 2011) (same); Dep't of Enforcement v. Cody, No. FINRAs findings alleged that VALIC violated Rule 2330 by failing to implement surveillance procedures designed to detect broker recommendations in violation of FINRA Rule 2330. Does FINRA expect broker-dealers or institutional customers to provide more specificity? The supervisory review and approval process. 35 For certain requirements related to day trading, see FINRA Rules 2130 and 2270. Rule 2330 FINRA Rule ________ requires that a member representative have a reasonable basis to believe that the variable annuity transaction is suitable for the customer before recommending the purchase or exchange of a variable annuity. 52562, 52567 (Aug. 26, 2010)]. [Notice 12-25 (FAQ 1)]. Q1.1. FINRA Rule 2330 establishes certain sales practice standards involving the purchase and exchange of deferred variable annuities. Firms and brokers may want to consult those Regulatory Notices87 and cases88 when considering the types of recommended securities and investment strategies involving securities that they should document. We don't compare one month's return to another's; we compare the actual to the assumed. Definition and Examples, Letter of Acceptance, Waiver & Consent (AWC). Customer Protection Permissible Use of Customers' Securities The Rule Notices Guidance News Releases FAQs 4320. Disclaimer: The summary and detailed topics are only available for, FINRA operates the largest securities dispute resolution forum in the United States, To report on abuse or fraud in the industry. [See infra note 38] (emphasis in original). Id. Conversely, the recommendation of a complex and/or potentially risky security or investment strategy involving a security or securities usually would require documentation. The suitability rule generally requires broker-dealers to use reasonable diligence to seek to obtain and analyze the customer-specific factors listed in the rule. Special Purpose Acquisition Companies (SPACs), The FINRA Arbitration Process & Filing a Claim, What is Securities Fraud? Read a copy of the award here. Amended by SR-FINRA-2014-045 eff. [Notice 11-25 (FAQ 3)]. A firm's analysis of whether the identification of a more limited universe of fixed-income securities constitutes a recommendation of particular securities may, depending on the facts and circumstances, differ from its assessment regarding equity securities. Id. What types of "hold" recommendations should firms consider documenting? Would a firm violate the suitability rule if it makes recommendations to customers for whom it has not obtained all of the customer-specific information listed in FINRA Rule 2111(a)? But opting out of some of these cookies may affect your browsing experience. 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." 20452 (Apr. 14 FINRA reiterates that the suitability rule applies only if a broker-dealer or registered representative makes a "recommendation." 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. Rule 206(4)-5; Engaging in Distribution and Solicitation Activities with Government Entities, FINRA Rule 2030. In addition, for other FINRA rules that have suitability components such as FINRA Rule 2330 (Members Responsibilities regarding Deferred Variable Annuities) and FINRA Rule 2360 (Options), the suitability standard remains intact. FINRA's supervision rules do not dictate the exact manner in which a broker-dealer must supervise its registered representatives' recommendations of investment strategies involving a security and a non-security investment. Rule 2330 requires that the member or person associated with a member consider whether the customer has had another deferred variable annuity exchange within the preceding 36 months. Dec. 14, 2009. FINRA Fines VALIC Financial Advisors, Inc. $1.75 Million for Failure to Prevent Conflicts of Interest in its Compensation Policy and for Other Supervisory Failures Related to Variable Annuity Sales November 28, 2016 News Release FINRA Fines Eight Firms a Total of $6.2 Million for Supervisory Failures Related to Variable Annuity L-Shares Every member in the conduct of its business shall adhere to the provisions of SEC Rule 15c3-3 under the Act with respect to obtaining possession and control of securities, and the maintenance of appropriate cash reserves. 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. 55988, 2007 SEC LEXIS 1407, at *21-23 (June 29, 2007) (describing the speculative nature of three low-priced securities at issue); Faber, 2004 SEC LEXIS 277, at *25 (discussing speculative nature of the security of a company that "had no revenues and had never showed any profits"); Jack H. Stein, 56 S.E.C. Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. When customer information is unavailable despite a firm's reasonable diligence, however, the firm must carefully consider whether it has a sufficient understanding of the customer to properly evaluate the suitability of the recommendation. Industry Regulatory Authority ("FINRA"). Id. 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.49, Q4.5. 94 In Notice to Members 99-45, FINRA said that the supervision rule "requires that a [firm's] supervisory system be reasonably designed to achieve compliance with applicable laws and regulations. [Notice 12-55 (FAQ 10(b)]. (i) the customer has been informed, in general terms, of various features of deferred variable annuities, such as the potential surrender period and surrender charge; potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59; mortality and expense fees; investment advisory fees; potential charges for and features of riders; the insurance and investment components of deferred variable annuities; and market risk; (ii) the customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit; and, (iii) the particular deferred variable annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or exchange of the deferred variable annuity, and riders and similar product enhancements, if any, are suitable (and, in the case of an exchange, the transaction as a whole also is suitable) for the particular customer based on the information required by paragraph (b)(2) of this Rule; and, (B) in the case of an exchange of a deferred variable annuity, the exchange also is consistent with the suitability determination required by paragraph (b)(1)(A) of this Rule, taking into consideration whether. In this regard, firms should note that, as an allocation recommendation becomes narrower or more specific, the recommendation gets closer to becoming a recommendation of particular securities and, thus, subject to the suitability rule, depending on a variety of factors (including the number of issuers that fall within the broker-dealer's allocation recommendation).55 Accordingly, broker-dealers should assess whether allocation recommendations involving certain types of sub-categories of broader market sectors or even more limited groupings are so specific or narrow that they constitute recommendations of particular securities.56, Q4.8. PDF Frequently Asked Questions about FINRA Rule 2111 - Suitability This Rule does not apply to reallocations among subaccounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity. 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. 20070091803 (Oct. 20, 2010) (discussing reverse convertibles exposing investors to risks in addition to those risks associated with investment in bonds and bond funds, and having complex pay-out structures involving multiple variables); Jeffrey C. Young, Exchange Act Rel. 75 See Curtis I. Wilson, 49 S.E.C. 4330. C3A960029, 1999 NASD Discip. The suitability rule would not apply, for instance, if a registered representative recommends a non-security investment as part of an outside business activity and the customer separately decides on his or her own to liquidate securities positions and apply the proceeds toward the recommended non-security investment.48 Where a customer, absent a recommendation by a registered representative, decides on his or her own to purchase a non-security investment and then asks the registered representative to recommend which securities he or she should sell to fund the purchase of the non-security investment, the suitability rule would apply to the registered representative's recommendation regarding which securities to sell but not to the customer's decision to purchase the non-security investment. The factors that must exist for an institutional customer to qualify for the exemption may, depending on the facts, negate some of the elements relevant to a showing of a broker's "control" over the account. In many circumstances, the answer is yes. Dec. 1, 2014. Nothing in this guidance, however, relieves a firm from having to ensure that the investment profiles or factors accurately reflect the customer's decisions. Note: With this guidance, FINRA attempts to present information in a format that is easily understandable. 57 FINRA Rule 2111.05(a). Rule 2330 does not prohibit using the information required for principal review and approval in the issuance process, provided that the broker-dealer and the insurance company have agreed that the insurance company will not issue the contract prior to principal approval by the broker-dealer.

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