Suitability obligations are critical to ensuring investor protection and promoting fair dealings with customers and ethical sales practices. FINRA Rule 2111 governs general suitability obligations, while certain securities are covered under other rules that may contain additional requirements.
FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.
The rule states that the customer’s investment profile “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs [and] risk tolerance,” among other information. A broker’s “recommendation,” which is based on the facts and circumstances of a particular case, is the triggering event for application of the rule.
Brokers must have a firm understanding of both the product and the customer, according to Rule 2111. The lack of such an understanding itself violates the suitability rule.
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The Outside Business Activities and Private Securities Transactions section of the 2017 Report on Exam Findings informs member firms’ compliance programs by describing recent findings and observations from FINRA’s examinations, and, in certain cases, also providing a summary of effective practices.
Registered financial professionals, like many of us, move on to new job and career opportunities for a number of reasons. FINRA requires brokerage firms to deliver an educational communication to former customers who are contacted about transferring their assets when their financial professional changes from one broker-dealer to another.
SEC Approves Amendments to Modernize and Simplify NASD Rule 2720 Relating to Public Offerings in Which a Member Firm With a Conflict of Interest Participates
SEC Approves Rule Requiring Delivery of an Educational Communication to Customers of a Transferring Representative
The Outside Business Activities and Private Securities Transactions topic of the 2024 FINRA Annual Regulatory Oversight Report (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) regulatory obligations and related considerations, (2) findings and effective practices, and (3) additional resources.
The Reg BI and Form CRS section of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
FINRA Rule 2360(b)(23)(C) requires member firms conducting transactions in exchange-listed options to establish fixed procedures for allocating options exercise assignment notices to short options positions in their customer accounts. Firms may elect to allocate exercise assignment notices on: (1) a “first in-first out” basis (FIFO); (2) a random selection basis; or (3) another equally random
The Best Execution, Outside Business Activities and Private Securities Transactions, Private Placements, and Reg BI and Form CRS sections of the 2023 Report on FINRA’s Examination and Risk Monitoring Program (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) regulatory obligations and related considerations, (2) findings and effective practices, and (3) additional resources.
