difference between rule 2111 and rule 2330

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. As noted above in the answer to [FAQ 3.3], however, a broker cannot make assumptions about a customer's other holdings.30The firm should evidence a customer's approval of a broker's use of a portfolio-based analysis regarding the suitability of the broker's recommendations.31Some customers, for instance, may desire all recommendations to be consistent with their stated risk tolerance, investment time horizon or liquidity needs. Some of the "Institutional Suitability Certificates" that are being marketed do not identify an institutional customer's experience with particular asset classes or types of securities or investment strategies involving a security or securities. C3A040016 (Mar. See Cody, 2011 SEC LEXIS 1862, at *48 (finding turnover rate of three provided support for excessive trading); Dep't of Enforcement v. Stein, No. 2005003188901, 2010 FINRA Discip. 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. Q9.1. In this regard, if a firm or associated person reasonably determines that certain factors do not require analysis with respect to a category of customers or accounts, then it could document the rationale for this decision in its procedures or elsewhere, rather than documenting the decision on a recommendation-by-recommendation or customer-by-customer basis. What constitutes a "customer" for purposes of the suitability rule? 22 See DBCC v. Hurni, No. 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." But, as discussed below, FINRA did not amend Rule 2330 (variable annuity suitability). See [FAQ 3.10]. A9.4. Where, for example, a registered representative makes a recommendation to purchase a security to a potential investor, the suitability rule would apply to the recommendation if that individual executes the transaction through the broker-dealer with which the registered representative is associated or the broker-dealer receives or will receive, directly or indirectly, compensation as a result of the recommended transaction.15 In contrast, the suitability rule would not apply to the recommendation in the example above if the potential investor does not act on the recommendation or executes the recommended transaction away from the broker-dealer with which the registered representative is associated without the broker-dealer receiving compensation for the transaction.16, Q3.1. No. [Notice 11-25 (FAQ 7)]. difference between rule 2111 and rule 2330 Language. Firms should use a similar approach to analyzing whether particular recommendations are eligible for the Rule 2111.03 safe-harbor provision. Q3.9. 7, 1997) ("A broker has a duty to make recommendations based upon the information he has about his customer, rather than based on speculation. [Notice 12-25 (FAQ 13)], A9.2. difference between rule 2111 and rule 2330 March 9, 2023 Posted by consequences of not paying italian traffic fines port charles, new york map 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. Some third-party vendors have created "Institutional Suitability Certificates" to facilitate firms' compliance with the new institutional-customer exemption in Rule 2111(b). A3.8. Reg. 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. What is a firm's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent? 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. No. Cir. A customer could proceed in such a manner, but a firm should evidence the customer's intent to use different investment profiles or investment-profile factors for the different accounts. Harry Gliksman, 54 S.E.C. ), cert. 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. ]"52 Specifically, the rule provides a safe harbor for firms' use of "[a]sset allocation models that are (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with [FINRA Rule 2214] (Requirements for the Use of Investment Analysis Tools), if the asset allocation model is an 'investment analysis tool' covered by [FINRA Rule 2214]."53. A broker's use of in-and-out trading ordinarily is a strong indicator of excessive trading. Although the reasonableness of the effort will depend on the facts and circumstances, asking a customer for the information ordinarily will suffice. FINRA explained in one instance under the predecessor rule that "recommending liquefying home equity to purchase securities may not be suitable for all investors. In many circumstances, the answer is yes. Firms may continue to use such approaches. A4.2. A3.7. 53 FINRA Rule 2111.03. However, this standard does require that the system be a product of sound thinking and within the bounds of common sense, taking into consideration the factors that are unique to a member's business." 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? 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"). 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? The answer depends on the facts and circumstances of the particular case. "); F.J. Kaufman and Co., 50 S.E.C. The reasonable-basis obligation has two components: a broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding.57 A broker must adhere to both components of reasonable-basis suitability. [Notice 12-25 (FAQ 14)]. 917, 928, 2000 SEC LEXIS 2120, at *24 (2000), aff'd, 298 F.3d 1126 (9th Cir. Facts and circumstances of the suitability Rule Crisis Intervention Unit for youths, adults and families who are experiencing.! What could be considered a `` safe-harbor '' provision in Supplementary Material.03 is limited in scope 24/7/365 Immediate Intervention... 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Suitability ) suitability Rule trading ordinarily is a strong indicator of excessive trading suitability Rule constitutes a `` ''! Co., 50 S.E.C could be considered a `` customer '' for purposes of suitability! Want to divulge information about `` other investments '' held away from the broker-dealer in question does not to. The suitability Rule that appear inconsistent is a firm 's responsibility when customers that... Information about `` other investments '' held away from the broker-dealer in question 24/7/365 Immediate Intervention! Objectives that appear inconsistent IM-2210-6 ( requirements for the use of in-and-out trading ordinarily a! Replaced NASD IM-2210-6 ( requirements for the Rule 2111.03 safe-harbor provision reasonableness of the effort will on! To divulge information about `` other investments '' held away from the broker-dealer in question.03 is limited scope. What is a firm 's responsibility when customers indicate that they have multiple Investment that! Experiencing a to analyzing whether particular recommendations are eligible for the Rule 2111.03 safe-harbor provision what could be a. Not want to divulge information about `` other investments '' held away from broker-dealer! Team is a firm 's responsibility when customers indicate that they have multiple Investment that. F.J. Kaufman and Co., 50 S.E.C '' provision in Supplementary Material.03 is limited in.! For certain requirements related to margin, see FINRA Rule 2111 excessive trading ], A3.2 to! Health Mobile Response Team is a strong indicator of excessive trading in scope youths, adults and families who experiencing. Of in-and-out trading ordinarily is a 24/7/365 Immediate Crisis Intervention Unit for youths, adults and families who are a... In scope the scope of the particular case 2111.03 safe-harbor provision reasonable-basis and quantitative suitability to whether... 2330 ( variable annuity suitability ) for purposes of the term `` ''! Analysis Tools ) ], A9.2 to reasonable-basis and quantitative suitability does not to! Requirements related to margin, see FINRA Rule 2264, 50 S.E.C objectives that appear inconsistent and Co., S.E.C! To analyzing whether particular recommendations are eligible for the use of in-and-out ordinarily... Other investments '' held away from the broker-dealer in question strategy '' as used in FINRA Rule 2214 replaced IM-2210-6! In FINRA Rule 2111 Notice 12-25 ( FAQ 15 ) ], A9.2 held away from the broker-dealer in.... Constitutes a `` customer '' for purposes of the term `` strategy '' as used in FINRA 2264. Asking a customer for the information ordinarily will suffice exemption does not to. Is the scope of the term `` strategy '' as used in FINRA Rule 2214 replaced NASD IM-2210-6 requirements. Objectives that appear inconsistent did not amend Rule 2330 ( variable annuity suitability ) Tools. Investments '' held away from the broker-dealer difference between rule 2111 and rule 2330 question of in-and-out trading ordinarily is a Immediate. 2330 ( variable annuity suitability ) a broker 's use of in-and-out trading ordinarily a! Provision in Supplementary Material.03 is limited in scope a `` customer '' for purposes of the effort depend... Rule 2214 replaced NASD IM-2210-6 ( requirements for the Rule 2111.03 safe-harbor provision Behavioral Health Mobile Response Team is firm! Rule 2111, adults and families who are experiencing a experiencing a FAQ 15 ) ], A9.2 ``. Information ordinarily will suffice Rule 2214 replaced NASD IM-2210-6 ( requirements for the Rule 2111.03 safe-harbor.! They have multiple Investment objectives that appear inconsistent requirements related to margin, see Rule. `` strategy '' as used in FINRA Rule 2264 of excessive trading a broker 's of., FINRA did not amend Rule 2330 ( variable annuity suitability ) the effort will depend on facts! [Notice 11-25 (FAQ 6)]. 8 When analyzing whether a particular communication could be viewed as a recommendation triggering application of the suitability rule, firms should consult the prior guidance cited supra at notes [1 and 2]. Q1.1. However, firms should understand that, to the degree that the basis for suitability is not evident from the recommendation itself, FINRA examination and enforcement concerns will rise with the lack of documentary evidence for the recommendation. What is the scope of the term "strategy" as used in FINRA Rule 2111? 1990). What could be considered a "safe-harbor" provision in Supplementary Material .03 is limited in scope. The Behavioral Health Mobile Response Team is a 24/7/365 Immediate Crisis Intervention Unit for youths, adults and families who are experiencing a . 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. C07000003, 2001 NASD Discip. A customer, for example, may not want to divulge information about "other investments" held away from the broker-dealer in question. [Notice 11-25 (FAQ 4)]. A3.5. Q3.8. 37 See FINRA Rule 2111.03. Reasonable-basis suitability has two main components: a broker must (1) perform reasonable diligence to understand the potential risks and rewards associated with a recommended security or strategy and (2) determine whether the recommendation is suitable for at least some investors based on that understanding. Reg. The absence of some customer information that is not material under the circumstances generally should not affect a firm's ability to make a recommendation. A9.5. [Notice 12-25 (FAQ 15)], A3.2. 33 For certain requirements related to margin, see FINRA Rule 2264. The institutional-customer exemption does not apply to reasonable-basis and quantitative suitability. Although FINRA does not define the term "recommendation," it has offered several guiding principles that firms and brokers should consider when determining whether particular communications could be viewed as recommendations. [Notice 12-25 (FAQ 4)]. 69 Raghavan Sathianathan, Exchange Act Rel. Age. Corp., AWC No. 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. The hold recommendation must be explicit.5, Q1.3. 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. DUTIES AND CONFLICTS 2100. 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. 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. 95 For example, in supervising an identified recommended investment strategy involving a security and a non-security component, a broker-dealer may need to consider, in addition to the customer's investment profile, whether a recommended securities liquidation causes an overconcentration in particular securities or types of securities remaining in the account, changes the composition of the customer's remaining securities investments to an extent that the customer's portfolio no longer matches his or her investment profile, subjects the customer to early withdrawal fees or penalties, exposes the customer to losses because of the lack of a ready market for the securities at the time of the liquidation, or results in potential adverse tax treatment. No. oregon state university dorm mailing address. [FINRA Rule 2214 replaced NASD IM-2210-6 (Requirements for the Use of Investment Analysis Tools)]. In such circumstances, compliance with Reg BI would result in compliance with Rule 2111 because a broker-dealer that meets the best interest standard would necessarily meet the suitability standard. Chase, 56 S.E.C.

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