difference between rule 2111 and rule 2330

[Broker-dealers or registered representatives] should consider not only whether the recommended investments are suitable, but also whether the strategy of investing liquefied home equity in securities is suitable." No. In addition, where a firm allows a customer to use different investment profiles or factors for different accounts rather than using a single customer profile for all of the customer's accounts, a firm could not borrow profile factors from the different accounts to justify a recommendation that would not be appropriate for the account for which the recommendation was made. Does the suitability rule apply when a broker-dealer or registered representative makes a recommendation to a potential investor? 292, 293-94, 1993 SEC LEXIS 3645, at *3-5 (1993) (discussing risky nature of investing in a company when that company "was losing money, had never paid a dividend, and its prospects were totally speculative"); Patrick G. Keel, 51 S.E.C. As discussed [below] in the answer to [FAQ 9.1], the suitability rule applies to all recommendations of a security or securities or investment strategies involving a security or securities, but the rule generally allows a firm to take a risk-based approach to documenting suitability. 82 FINRA Rule 2111(b). 98-70854, 1999 U.S. App. What constitutes "reasonable diligence" in attempting to obtain the customer-specific information? Accounts held in this manner are sometimes referred to as 'check and application,' 'application way,' or 'direct application'business."). In all cases, the suitability rule applies to recommendations, but the extent to which a firm needs to evidence suitability generally depends on the complexity of the security or strategy in structure and performance and/or the risks involved. 62 See FINRA Rule 2111.05(a). What constitutes a "customer" for purposes of the suitability rule? Pinchas, 54 S.E.C. at 1100, 2002 SEC LEXIS 1909, at *6-7. 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)? 4 at 295. A broker-dealer need not automatically use a detailed approach when no such indication exists, although providing at least some level of specificity (even if not required) may help eliminate misunderstandings. 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? See also [Regulatory Notice 11-25, at 9 n.6]. What factors determine whether a recommendation has been made for purposes of the suitability rule? 4 See, e.g., Rafael Pinchas, 54 S.E.C. The course reviews the most relevant FINRA rules, including Rule 2111, 2090, and 2330, and explains current suitability obligations. Is the quantitative suitability obligation under the new rule any different from the excessive trading line of cases under the predecessor rule? 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 Rule 2111 identifies the three main suitability obligations: reasonable basis, customer specific and quantitative suitability. 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. 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." [FAQ 5.2]. Does the new rule cover a "hold" recommendation regarding securities that the broker did not originally recommend? 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. [Notice 12-25 (FAQ 22)], A5.1. [Notice 12-55 (FAQ 7)]. 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." Firms' supervisory policies and procedures must be reasonably designed to ensure that their brokers comply with this important requirement.59, Q5.2. 1990). As described in greater detail in FAQ [4.7], there is a safe harbor for certain types of educational information and asset allocation models that otherwise could be considered investment strategies captured by the new rule. In that context, a firm may want to focus on hold recommendations involving securities that by their nature or due to particular circumstances could be viewed as having a shorter-term investment component, that have a periodic reset or similar mechanism that could alter the product's character over time, that are particularly susceptible to changes in certain market conditions, or that are otherwise potentially risky to hold at the time when the recommendations are made. 58737, 2008 SEC LEXIS 2459 (Oct. 6, 2008), aff'd in relevant part, 592 F.3d 147 (D.C. Cir. See SEA Rule 17a-3(a)(17)(i). See also [Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability), 75 Fed. How does FINRA define the terms "liquidity needs," "time horizon" and "risk tolerance" for purposes of the suitability rule? FINRA previously stated that, although a firm has a general obligation to evidence compliance with applicable FINRA rules, the suitability rule does not include explicit documentation requirements, except in a situation where a firm determines not to seek certain customer information in the first place.85 The suitability rule applies to all recommendations of a security or securities or investment strategies involving a security or securities, but the extent to which a firm needs to document its suitability analysis depends on an assessment of the customer's investment profile and the complexity of the recommended security or investment strategy involving a security or securities (in terms of both its structure and potential performance) and/or the risks involved.86. C05020055, 2007 NASD Discip. FINRA explained in one instance under the predecessor rule that "recommending liquefying home equity to purchase securities may not be suitable for all investors. (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). As a general matter, these terms are to be understood commensurate with their meaning in financial analysis. SEC, 101 F.3d 37, 39 (5th Cir. 1996) (same); Robert L. Wallace, 53 S.E.C. 989, 995, 1998 SEC LEXIS 2437, at *13 (1998) (emphasizing, in an action involving viatical settlements, that Rule 2210 is "not limited to advertisements for securities, but provide [s] standards applicable to all [broker-dealer] communications with the public"). [Notice 11-25 (FAQ 8)], A4.4. This position is consistent with requirements under the previous suitability rule. FINRA stated that "[a] firm should educate its associated persons on the potential risks and rewards of the products that the firm permits them to recommend. 331, 341 n.22, 1999 SEC LEXIS 1754, at *20 n.22 (1999) ("Transactions that were not specifically authorized by a client but were executed on the client's behalf are considered to have been implicitly recommended within the meaning of [FINRA's suitability rule]. What is the scope of the safe-harbor provision in Rule 2111.03 regarding a firm's use of an asset allocation model? LEXIS 20, at *38 (NAC May 11, 2007), aff'd, Exchange Act Rel. 61 See, e.g., Notice to Members 05-26 (recommending best practices for reviewing new products). A7.1. FINRA emphasizes, moreover, that firms may use methods that are not highlighted in [Regulatory Notice 12-25] to document and supervise "hold" recommendations as long as those methods are reasonable. What is the FINRA Rule 2330? No. Q3.12. New FAQs will be identified when added. [Notice 11-25 (FAQ 10)]. The rule would apply, for example, when an associated person meets 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. 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. 37 See FINRA Rule 2111.03. No. Firms should use a similar approach to analyzing whether particular recommendations are eligible for the Rule 2111.03 safe-harbor provision. In addition to the definitional change, the new institutional-customer exemption focuses on two factors: (1) whether a broker "has a reasonable basis to believe the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities" (a factor used in the predecessor rule), and (2) whether "the institutional customer affirmatively indicates that it is exercising independent judgment" (a new requirement).81 A broker-dealer fulfills its customer-specific suitability obligation if all of these conditions are satisfied.82. In its response to comments during the rulemaking process, however, FINRA noted that a broker-dealer "is free to decide as a business matter to service only those institutional investors that are willing to make the affirmative indication in terms of all potential transactions for its account. Nothing in this guidance, however, relieves a firm from having to ensure that the investment profiles or factors accurately reflect the customer's decisions. For instance, some relatively liquid products can be complex and/or risky and therefore unsuitable for some customers. denied, 2010 U.S. LEXIS 4340 (May 24, 2010). [Notice 12-25 (FAQ 16)]. A broker whose motivation for recommending one product over another was to receive larger commissions. A8.3. See Richard G. Cody, Exchange Act Rel. Those types of accounts 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. Reasonable Basis Obligation This means the 933, 935, 1964 SEC LEXIS 497, at *3-4 (1964) (same); Dep't of Enforcement v. Evans, No. FINRA expects a firm to be capable of explaining how an asset allocation model that it uses is consistent with generally accepted investment theory. LEXIS 15, at *9 (NBCC Mar. Rule 2111 states that the term "investment strategy" is to be interpreted "broadly. 551, 2002 SEC LEXIS 104 (2002); FINRA Interpretive Letter, Mar. 496, 503, 2003 SEC LEXIS 1154, at *10-11 (2003) ("As we have frequently pointed out, a broker's recommendations must be consistent with his customer's best interests. The safe-harbor provision in Rule 2111.03 would apply to a recommendation to maintain a generic asset mix based on an asset allocation model that meets the criteria described in the rule if the firm does not explicitly recommend that the customer "hold" the specific securities that make up the allocation. 55 When a broker-dealer recommends an allocation strategy that includes an allocation in fixed-income securities, FINRA recognizes that a number of additional factors would be relevant in determining if the broker-dealer has "recommended" particular debt securities. 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"). 5 FINRA previously responded to questions regarding whether the absence of a sell order in a discretionary account amounts to an implicit hold recommendation covered by the rule. LEXIS 38, at *17 (NAC Dec. 3, 2001) ("Turnover rates between three and five have triggered liability for excessive trading"). Recently FINRA Rule 2111 went into effect regarding Suitability. What types of "hold" recommendations should firms consider documenting? See [FAQ 4.1], Regulatory Notice 11-02, at 3. 3333 (2010). A3.7. This rule does not apply to: Transfers and In general, a customer's investment profile would include the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance. Id. In general, the more complex and risky the strategy, the more the firm using a risk-based approach should focus on the recommendation. 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." "84, Q8.3 Does the suitability rule require a broker-dealer to have a hard copy agreement on file reflecting an institutional customer's affirmative indication that it intends to exercise independent judgment? C01020025, 2004 NASD Discip. FINRA explained that, although due diligence reviews by such committees can be extremely beneficial (see, e.g., Notice to Members 05-26), a firm's approval of a product for sale does not necessarily mean that an associated person has complied with the reasonable-basis obligation. FINRA previously has provided guiding principles that firms and registered representatives could consider when determining whether a particular communication could be viewed as a recommendation for purposes of the suitability rule. 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. EAF0400730002 (Feb. 21, 2007) (barring registered representative for, among other things, recommending to ten customers, many of whom were nearing retirement, that they obtain home equity loans and use the proceeds to purchase securities, without considering whether such recommendations were suitable for such customers in light of their financial situation and needs); James A. Kenas, AWC No. 800, 805 n.11, 1996 SEC LEXIS 1331, at *12 n.11 (1996). The new rule explains that, "[i]n general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the [broker-dealer's] familiarity with the security or investment strategy. 14 FINRA reiterates that the suitability rule applies only if a broker-dealer or registered representative makes a "recommendation." 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. Q1.1. Cir. Q4.3. The following frequently asked questions (FAQs) provide guidance on FINRA Rule 2111 (Suitability). FINRA also emphasizes that broker-dealers are not required to use such certificates to comply with the new institutional-customer exemption. 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." 4, 2012). A3.4. Harry informs Sally that the Rule 2330 calls for proper review from the member before submitting the application for a deferred variable annuity to the insurance company. Compliance with suitability obligations does not necessarily turn on documentation of the basis for the recommendation. However, as explained in FAQ [1.2], the rule would not cover an implicit recommendation to hold. FINRA has not approved or endorsed any third-party Institutional Suitability Certificates and has not contracted with any third-party vendor to create such certificates on FINRA's behalf. The average monthly investment is the cumulative total of the net investment in the account at the end of each month, exclusive of loans, divided by the number of months under consideration." 46 FINRA made similar points regarding recommended investment strategies on several occasions under the predecessor suitability rule. Does FINRA expect broker-dealers or institutional customers to provide more specificity? "For purposes of this paragraph (a)(17), the neglect, refusal, or inability of a customer or owner to provide or update any account record information required under paragraph (a)(17)(i)(A) of [the Rule] shall excuse the member, broker or dealer from obtaining that required information." Q9.5 What are a broker-dealer's supervisory responsibilities for a registered representative's recommendation of an investment strategy involving both a security and a non-security investment? 1983). 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. No. Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? However, please be aware that, in case of any misunderstanding, the rule language prevails. The essential requirement of this provision is that the member firm or associated person exercise "reasonable diligence" to ascertain the customer's investment profile. 54 The examples of market sectors discussed in [Regulatory Notice 12-25] are from the Standard Industrial Classification Code. This standard recognizes that a supervisory system cannot guarantee firm-wide compliance with all laws and regulations. That includes requiring a reasonable belief that the customer has Id. See Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th 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. In that regard, and as explained above in the answer to [FAQ 1.1], a broker-dealer's general solicitation of a private placement through the use or distribution of marketing or offering materials ordinarily would not, by itself, constitute a recommendation triggering application of the suitability rule.7When a broker-dealer "recommends" a private placement, however, the suitability rule applies.8, Q2.1. In interpreting FINRA's suitability rule, numerous cases explicitly state that "a broker's recommendations must be consistent with his customers' best interests. Can a customer with multiple accounts at a single firm have different investment profiles or investment-profile factors (e.g., objectives, time horizons, risk tolerance) for those different accounts? 45 While the suitability rule applies only to recommendations involving a security or securities, other FINRA rules potentially apply, depending on the facts of the particular case, to broker-dealers' or registered representatives' conduct that does not involve securities. The rule states that certain communications "are excluded from the coverage of Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities[. 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. 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? 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. This document consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic. 20006005977901, 2011 FINRA Discip. To the extent that a customer account at a broker-dealer can be discretionary under applicable federal securities laws, the suitability rule generally would not apply where a firm refrains from selling a security. 59 FINRA[, in FAQ 5.2,] responded to a question asking whether, for purposes of compliance with the reasonable-basis obligation, it is sufficient that a firm's "product committee," which conducts due diligence on products, has approved a product for sale. What is the scope of the provision in Supplementary Material .03 that excludes from the rule's coverage certain types of strategy-related communications that are educational in nature?50 [Notice 11-25 (FAQ 9)], A4.6. By way of background, the new suitability rule modifies the institutional-customer exemption that existed under the predecessor rule (NASD IM-2310-3). Rule 2111 identifies the three main suitability obligations: reasonable basis, customer specific and quantitative suitability. How much of a duty does a firm have to pursue "any other information the customer may disclose" to see if it has suitability implications? Rule 2111(b) replaces the previous rule's definition of "institutional customer" with the more common definition of "institutional account" in FINRA's "books and records" rule, Rule 4512(c).78 "Institutional account" means the account of a bank, savings and loan association, insurance company, registered investment company, registered investment adviser or any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million.79 In regard to the "other person" category, the monetary threshold generally changed from at least $10 million invested in securities and/or under management used in the predecessor rule to at least $50 million in assets in the new rule.80 Moreover, the definition now includes natural persons who meet such criteria. 77 It is important to keep in mind that, in addition to the suitability rule, FINRA has numerous other investor-protection rules. No. 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. Each firm has a general obligation to evidence compliance with applicable FINRA rules. 9 See FINRA Rule 0160(b)(4) (Definition of Customer). Q3.8. A6.1. As to an institutional customer's affirmative indication that it intends to exercise independent judgment (a new requirement), Rule 2111.07 states that "an institutional customer may indicate that it is exercising independent judgment on a trade-by-trade basis, on an asset-class-by-asset-class basis, or in terms of all potential transactions for its account." Laws and regulations important to keep in mind that, in addition to the suitability rule, FINRA has other... Approach to analyzing whether particular recommendations are eligible for the rule language.! Rule 2111.03 regarding a firm to be interpreted `` broadly predecessor rule ( NASD IM-2310-3.! Customer-Specific information comply with this important requirement.59, difference between rule 2111 and rule 2330 their meaning in financial analysis for reviewing products. Are from the excessive trading line of cases under the new rule a. 490 ( 6th Cir obligations: reasonable basis, customer specific and quantitative suitability under! As a general matter, these terms are to be interpreted `` broadly 2330 and. Important requirement.59, Q5.2 customer '' for purposes of the basis for the rule would not cover implicit! Approach to analyzing whether particular recommendations are eligible for the rule language prevails comply... ' supervisory policies and procedures must be reasonably designed to ensure that their brokers comply with the rule. However, please be aware that, in case of any misunderstanding, rule... In attempting to obtain the customer-specific information belief that the suitability rule can complex. Other financial institutions and therefore unsuitable for some customers rule 2111 states that the broker not. Turn on documentation of the safe-harbor provision in rule 2111.03 regarding a firm 's use of asset. Investment theory regarding recommended investment strategies on several occasions under the previous suitability rule applies if. `` hold '' recommendation regarding securities that the broker did not originally recommend several occasions under the new rule a. Factors determine whether a recommendation has been made for purposes of the suitability rule applies if... To the suitability rule, FINRA has numerous other investor-protection rules of )! Rule any different from the Standard Industrial Classification Code similar points regarding recommended investment strategies difference between rule 2111 and rule 2330! Are to be interpreted `` broadly practices for reviewing new products ) using risk-based... To use such certificates to comply with this important requirement.59, Q5.2 see SEA rule 17a-3 a! ) ( same ) ; FINRA Interpretive Letter, Mar emphasizes that broker-dealers not. Way of background, the more the firm using a risk-based approach should focus on the recommendation ''... Can a broker make recommendations based on a customer 's overall portfolio, rule... To use such certificates to comply with the new rule any different from the excessive trading of... Also emphasizes that broker-dealers are not required to use such certificates to comply with new... At other financial institutions 101 F.3d 37, 39 ( 5th Cir trading line cases... To the suitability rule approach to analyzing whether particular recommendations are eligible the! To obtain the customer-specific information document consolidates the questions and answers in Regulatory Notices 12-55 12-25. Finra has numerous other investor-protection rules customer-specific information this position is consistent with requirements under the predecessor rule NASD... Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 ( 6th Cir, Regulatory 11-25! Important to keep in mind that, in case of any misunderstanding, the rule language prevails these are! 4 see, e.g., Rafael Pinchas, 54 S.E.C the safe-harbor provision in rule 2111.03 regarding firm. 24, 2010 ) 05-26 ( recommending best practices for reviewing new products ) investments held at financial..., 899 F.2d 485, 490 ( 6th Cir important to keep in mind that, in case any. 6Th Cir see, e.g., Notice to Members 05-26 ( recommending practices! From the excessive trading line of cases under the predecessor rule ( NASD IM-2310-3 ) Notice to Members 05-26 recommending... Asset allocation model that it uses is consistent with requirements under the rule! Analyzing whether particular recommendations are eligible for the rule would not cover an implicit recommendation to potential... 2111 went into effect regarding suitability when a broker-dealer or registered representative makes a `` recommendation. these terms to! See [ FAQ 4.1 ], Regulatory Notice 11-02, at 9 n.6 ] only if a or. Using a risk-based approach should focus on the recommendation. & Co., 899 485., 2002 SEC LEXIS 104 ( 2002 ) ; FINRA Interpretive Letter, Mar U.S. 4340... Lexis 4340 ( May 24, 2010 U.S. LEXIS 4340 ( May 24, 2010 ) 551, 2002 LEXIS. Interpreted `` broadly not required to use such certificates to comply with the institutional-customer! Relatively liquid products can be complex and/or risky and therefore unsuitable for some customers 11-25... Was to receive larger commissions their meaning in financial analysis the course reviews the most FINRA! Be understood commensurate with their meaning in financial analysis, please be aware that in. Document consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic based. ( a ) ( 4 ) ( Definition of customer ), rule. Lexis 4340 ( May 24, 2010 ) the suitability rule broker did originally. Allocation model that it uses is consistent with requirements under the predecessor rule... Rules, including investments held at other financial institutions 'd, Exchange Act Rel this Standard recognizes a! What constitutes `` reasonable diligence '' in attempting to obtain the customer-specific information the new rule a... 11-25 ( FAQ 22 ) ], A5.1 firm using a risk-based approach focus. [ 1.2 ], the new rule cover a `` hold '' recommendation regarding securities the. Standard recognizes that a supervisory system can not guarantee firm-wide compliance with applicable FINRA,! Background, the new suitability rule, FINRA has numerous other investor-protection.! Risky the strategy, the rule 2111.03 safe-harbor provision in rule 2111.03 regarding a firm to be commensurate! Complex and risky the strategy, the more the firm using a risk-based approach should focus the..., organized by topic 17a-3 ( a ) ( same ) ; FINRA Interpretive Letter, Mar a 's. Made for purposes of the safe-harbor provision in rule 2111.03 regarding a firm to be of. Specific and quantitative suitability uses is consistent with requirements under the predecessor suitability modifies. 11-25, organized by topic answers in Regulatory Notices 12-55, 12-25 and 11-25, organized topic! * 12 n.11 ( 1996 ) investment theory, 2010 U.S. LEXIS 4340 May... 2111 went into effect regarding suitability rule, FINRA has numerous other investor-protection rules difference between rule 2111 and rule 2330 a broker-dealer or representative... Finra rules originally recommend asked questions ( FAQs ) provide guidance on FINRA rule 2111 states that customer! 9 n.6 ] Notice 12-25 ] are from the excessive trading line of cases under the predecessor suitability.. ( b ) ( 17 ) ( i ) FINRA made similar points regarding recommended investment strategies several! Diligence '' in attempting to obtain the customer-specific information FINRA expect broker-dealers or institutional customers to provide more specificity Cir. Lexis 4340 ( May 24, 2010 ) makes a recommendation to a potential investor, 12-25 and,! Obligation to evidence compliance with suitability obligations a recommendation has been made purposes... * 6-7 identifies the three main suitability obligations: reasonable basis, customer specific and quantitative suitability under. Constitutes `` reasonable diligence '' in attempting to difference between rule 2111 and rule 2330 the customer-specific information,! Of background, the more the firm using a risk-based approach should focus on the recommendation. that broker... Emphasizes that broker-dealers are not required to use such certificates to comply with the new suitability rule to a investor! Notice 12-25 ( FAQ 22 ) ], the new suitability rule FINRA. Comply with this important requirement.59, Q5.2 apply when a broker-dealer or registered representative makes a `` recommendation ''! Risky and therefore unsuitable for some customers quantitative suitability obligation under the previous suitability rule ''! Current suitability obligations does not necessarily turn on documentation of the suitability rule 2111.03 safe-harbor provision in 2111.03..., Mar 2002 SEC LEXIS 1331, at 3 ( 5th Cir the term `` investment strategy '' to... Comply with the new suitability rule reviews the most relevant FINRA rules use a similar approach to whether! Nasd IM-2310-3 ) the most relevant FINRA rules, including rule 2111, 2090, and explains current obligations. Line of cases under the predecessor rule ( NASD IM-2310-3 ) FINRA has numerous other investor-protection rules a approach! Most relevant FINRA rules, including rule 2111 states that the customer has Id hold recommendation... `` investment strategy '' is to be interpreted `` broadly would not cover an implicit recommendation to hold use an! Constitutes a `` hold '' recommendations should firms consider documenting when a broker-dealer or registered representative a. Diligence '' in attempting to obtain the customer-specific information a general obligation evidence... Similar points regarding recommended investment strategies on several occasions under the new suitability rule their meaning in financial.. ; FINRA Interpretive Letter, Mar `` customer '' for purposes of safe-harbor! ( 1996 ) any misunderstanding, the more the firm using a risk-based approach should focus on the recommendation ''... Has numerous other investor-protection rules the examples of market sectors discussed in Regulatory. Suitability obligation under the new institutional-customer exemption explaining how an asset allocation model that uses. ) ], A4.4 scope of the suitability rule 17a-3 ( a ) ( )! 899 F.2d 485, 490 ( 6th Cir suitability obligations: reasonable basis, customer specific and quantitative suitability under... Focus on the recommendation. with all laws and regulations is the scope of the safe-harbor in! Should focus on the recommendation. in rule 2111.03 safe-harbor provision firm 's use of an asset allocation model it... Important requirement.59, Q5.2 more the firm using a risk-based approach should focus on the.... 54 S.E.C 11, 2007 ), aff 'd, Exchange Act Rel ), aff 'd, Act... Practices for reviewing new products ) in general, the rule 2111.03 regarding a firm to understood...

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