The foundation of the securities industry is fair dealing with customers. Whether your work is with individuals, institutions or business entities, your obligation in this profession is to serve your customers with honesty and integrity by putting their interests first.
Below are descriptions of some rules that govern your activities, conduct and obligations to your customers.
Contact With Investors
You are obligated to disclose material information about investments that you discuss with or recommend to potential investors. Misrepresenting or omitting any material information in both discussions and distributed materials is prohibited and, under certain circumstances, may be considered fraud. Additionally, you are prohibited from guaranteeing that a securities transaction will not lose money. You should consult your supervisor if you have any questions regarding disclosures.
There are also restrictions on calling investors and telemarketing. For example, FINRA Rule 3230 generally prohibits “cold calling” a prospective customer before 8 a.m. or after 9 p.m. as well as calling an individual who previously stated that he or she does not want to receive calls or is on the national do-not-call registry. If you telemarket, you should have received training from your firm that addressed these and other requirements.
Opening Accounts and Knowing Your Customer
The first step in serving your customers properly is to “know your customer” in accordance with FINRA Rule 2090. You are responsible for ensuring that the essential facts concerning your customer are accurate and updated. You will obtain some of this information, including at least the customer information described in FINRA Rule 4512, when opening a new customer’s account with your firm. Your firm must also have a Customer Identification Program to verify the customer’s identity. Firm procedures on this will vary, but they may require that you review the customer’s driver’s license or passport or, for legal entity accounts, the entity’s formation documents. You may learn additional information through a review of your customer’s background, as required by your firm’s account opening procedures. For information about Anti Money Laundering (AML) compliance during account opening and thereafter, see FINRA’s AML page or FINRA Rule 3310.
Financial Exploitation of Specified Adults
FINRA Rule 2165 permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers when there is a reasonable belief of financial exploitation of these customers. In addition, amendments to FINRA Rule 4512 (Customer Account Information) requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account.
Alert your supervisor immediately if you believe that your customer is being exploited.
For additional information see FINRA Regulatory Notice 17-11 Financial Exploitation of Seniors.
Privacy and Protection of Customer Data
FINRA’s Customer Information Protection page will provide you with an understanding of the restrictions against disclosing non-public personal information about a customer and the manner in which customer information and records can become compromised (i.e., theft, intrusions into customer accounts and cyber security threats).
Alert your supervisor immediately if you believe that customer information may have been lost or stolen, (including via a lost laptop, smartphone or other electronic device), or if you suspect that customer accounts or company systems may have been subject to intrusion.
With the threat of cyberattacks increasing, you should be vigilant in the protection of your firm’s and clients’ information, especially confidential information. The costs of a successful cyberattack can be significant, and may include, for example, recovery of lost data, litigation and reputational damage. In December 2018, FINRA issued the Report on Selected Cybersecurity Practices – 2018 to share with firms information that may help them improve their cybersecurity practices. In addition, FINRA has published Investor Alerts that offer advice on steps individuals can take to protect themselves from cyber threats.
Some of the suggestions for you as an individual include: encrypting all confidential client data in transit, never sharing passwords, never downloading email attachments from unknown persons, not responding to email requests for confidential information, logging-out completely and using only your own computer to access confidential information. In addition, you should know your firm’s procedures for reporting a breach or attempted unauthorized access to confidential data as well as understand your role, if any, in your firm’s incident response plan. For additional information on cybersecurity practices, please see FINRA’s Cybersecurity page and cyber-related Investor Alerts as well as the SEC’s Investor Bulletin: Protecting Your Online Brokerage Accounts from Fraud.
If you make recommendations, you must understand the customer’s investment profile, which includes, but is not limited to, factors such as the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance and any other information that the customer may disclose. FINRA Rule 2111.05 imposes the following three obligations when making a recommendation: reasonable basis suitability (the recommendation must be suitable for at least some investors), customer specific suitability (the recommendation must be suitable for the particular customer to whom the recommendation was made) and quantitative suitability (a series of recommendations must be suitable when taken together in light of a customer’s investment profile). For additional information, please review the FAQ on the Suitability page.
You should know about different types of securities as well as the process of clearance and settlement of securities transactions (i.e., the timing of the actual exchange of money and securities). Depending on the security traded, settlement is usually two business days after the trade date, but may be the same day, the next day or some other time period. It is important that you inform your customers that money or securities are due on the settlement date and that your customer might be “bought in” at a higher price if securities are not promptly received to complete a sale, or may be “sold out” at a lower price if payment is not promptly received to complete a purchase. To avoid misunderstandings later, it is advisable that you explain the requirements and risks of buying securities in a cash account as well as a margin account prior to entering any order.
According to FINRA Rule 5310, firms must provide the customer with an execution price that is as favorable as possible under prevailing market conditions.
Orders for securities transactions are contracts. Unlike many business contracts, which are usually written, most securities orders are verbal. You should know how to place an order and, thereafter, how it is settled. Until you feel comfortable that your customer understands this process, take a few moments with each order from that customer to explain the mechanics of the transaction and the market conditions that may delay or prohibit its execution. Generally speaking, you should not enter an order for your customers without his/her expressed and detailed permission, as these trades may be deemed “unauthorized transactions.” In addition, when frequently recommending trades for a particular customer you should ensure that the trading is in line with the customer’s investment profile and not excessive, as frequent or excessive trading in a customer’s account may be deemed “churning.”
Generally, your customer must approve each order prior to your entering it. Your firm must then send confirming documentation to the customer at or before the completion of any resulting transaction. Under certain circumstances, a customer may grant you discretionary authority in accordance with FINRA Rule 3260. The customer must provide such authority in writing and it must be approved by your firm prior to your using discretion. Discretionary orders require more frequent supervisory review and, as a best practice, you should discuss such authority with your supervisor in advance of trading.
Markups, Commissions and Fees Charged for Services
Federal and state securities laws, SEC rules, and FINRA regulations affect the fees charged for all transactions including, for example, sales of new securities issues, secondary market offerings, and transactions involving mutual funds and variable contracts. Remember, if your customer is to benefit, the investment’s performance must first overcome the initial charges. When in doubt, ask your supervisor, review your firm’s procedures or consult FINRA Rule 2121. It is deemed a violation of FINRA Rule 2121 for a firm to enter into any transaction with a customer in any security at any price not reasonably related to the current market price of the security, or to charge a commission or mark up which is not reasonable.
FINRA Rule 2121 generally requires firms to charge only fair commissions or mark ups, and to buy or sell securities only at fair prices. When acting for its own account in a transaction with a customer, a member firm must buy or sell the security at a fair price to the customer, taking into consideration all relevant circumstances, including market conditions, the expense involved and the fact that the firm is entitled to a profit. In addition, the rule provides that when acting as an agent on behalf of its customer, the firm must not charge its customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service the firm may have rendered by reason of its experience in and knowledge of such security and the market.
In determining the meaning of “fair and reasonable” commission or mark-up, FINRA has a “5% Policy” guideline. Rarely is a markup on equity securities above 5 percent considered fair or reasonable. In fact, depending on the circumstances and the type of security involved markups at or below 5 percent may be considered unfair or unreasonable. For example, mark ups on debt securities are usually much less than 5 percent. Commissions approaching or exceeding 5 percent are subject to close regulatory scrutiny and must be justified, taking into account all relevant circumstances. You should always question situations in which you are asked to market securities with extraordinarily high markups, sales charges or payouts.
FINRA is concerned about retail customers being charged hidden, mislabeled or excessive fees of various types. Fair dealing with customers requires that charges be reasonable and disclosed up front in a manner that will allow investors to make informed investment decisions. Furthermore, under FINRA Rule 2122, any miscellaneous charges must be reasonable and related to the services performed.
Customer Funds and Accounts
You are not permitted to place customers’ checks or money intended for securities transactions into your own bank account or in the accounts of businesses that you are involved with outside of your broker-dealer, regardless of the amount of money or the length of time involved. Additionally, holding or hiding securities in someone else’s or a fictitious account (i.e., parking securities) is misleading and strictly prohibited. Mishandling customer funds is a serious violation of FINRA rules and could result in prosecution by state or federal criminal agencies.
The sharing of profits or losses in an account with a customer is generally prohibited. Before contemplating entering into such an arrangement, you should discuss it with your supervisor and consult FINRA Rule 2150.
You are not permitted to borrow or lend money between registered representatives and customers of the firm. There are a few conditions under which an arrangement could be permissible if specific conditions are met, under FINRA Rule 3240.
Customers have a right to complain about the handling of their accounts. Your firm should report any complaints that you receive in accordance with FINRA Rule 4530 and maintain records of customer complaints in accordance with FINRA Rule 4513. Your firm is required to maintain records of customer complaints regardless of the manner in which they were received, including oral complaints, emails, letters and text messages. These requirements apply regardless of the validity of the complaints or your belief that the complaint is frivolous. You must promptly notify your supervisor of any complaints that you receive and should not attempt to unilaterally resolve such complaints. Some customer complaints will require an amendment to the Form U4 and/or U5 to be filed, by the firm, in the CRD system.
Manipulative, Deceptive and Fraudulent Actions, Insider Trading
FINRA Rule 2020 prohibits any manipulative, deceptive or fraudulent actions. These actions are governed by securities rules and regulations, including FINRA rules. Some prohibited practices include insider trading (a potential violation of SEC Rule 10b-5 prohibiting fraud), front-running (violation of FINRA Rule 5270), intimidation (violation of FINRA Rule 5240) as well as other prohibited practices described in other sections of this brochure. These practices may harm the customer, another member firm, the integrity of the marketplace, the issuer of the securities or the public in general, and they would likely end your career in the securities business.
It is illegal to use or pass on to others material, nonpublic information or enter into transactions while in possession of such information. If you tell your customer to buy or sell a security based on a “hot tip,” you may have committed securities fraud. If the “hot tip” is not real, or is not “hot,” you have misled your customer. If it is a “hot tip,” you may be violating insider-trading rules. Either way, you can be subject to civil liability, disciplinary action and even criminal charges. If you become aware of insider trading or other fraud, you should contact your supervisor or file a Regulatory Tip. Illegal insider trading arises under many circumstances, so it is important to obtain sufficient training from your firm on this topic, and to consult with a supervisor or your firm’s compliance department whenever you are unsure whether a particular situation may cross the line into violative conduct.