As discussed above in the answer to [FAQ 4.7], Rule 2111.03 provides a safe harbor for firms' use of asset allocation models that are, among other things, based on "generally accepted investment theory." 82 FINRA Rule 2111(b). A broker whose motivation for recommending one product over another was to receive larger commissions. 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." [FINRA Rule 2214 replaced NASD IM-2210-6 (Requirements for the Use of Investment Analysis Tools)]. [Notice 12-25 (FAQ 5)], A1.4. The essential requirement of this provision is that the member firm or associated person exercise "reasonable diligence" to ascertain the customer's investment profile. That is true regardless of whether the associated person previously recommended the purchase of the securities, the customer purchased them without a recommendation, or the customer transferred them into the account from another firm where the same or a different associated person had handled the account.38, Q4.2. Under these circumstances, the suitability of a broker's recommendation may be analyzed on the basis of whether the customer's overall portfolio, considering any changes to the portfolio that flow from the broker's recommendation, aligns with the customer's investment profile.29. 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. C05020055, 2007 NASD Discip. A4.2. 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. [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." What constitutes "reasonable diligence" in attempting to obtain the customer-specific information? For example, a firm may conclude that age is irrelevant regarding all customers that are entities or liquidity needs are irrelevant regarding all customers for whom only liquid securities will be recommended. 6693, 6696 (Feb. 14, 1989) (stating that proposed SEA Rule 15c2-6, which would have required documented suitability determinations for speculative securities, "would not apply to general advertisements not involving a direct recommendation to the individual"); DBCC v. Kunz, No. 52562, 52567 (Aug. 26, 2010)]. Id. An explicit recommendation to hold is tantamount to a "call to action" in the sense of a suggestion that the customer stay the course with the investment. What is the scope of the safe-harbor provision in Rule 2111.03 regarding a firm's use of an asset allocation model? Rule 2111.03 excludes from the suitability rule's coverage various types of communications that are educational in nature even though they could be considered investment strategies involving securities. No. Under this provision, the suitability rule would not apply, for example, to a general recommendation that a customer's portfolio have certain percentages of investments in equity securities, fixed-income securities and cash equivalents, if the recommendation is based on an asset allocation model that meets the above criteria and the firm does not recommend a particular security or securities in connection with the allocation. New FAQs will be identified when added. 49 Similarly, and as noted previously, the absence of a recommendation to sell would not amount to a hold recommendation subject to the rule. The suitability rule would apply when a broker-dealer or registered representative makes a recommendation14 to a potential investor who then becomes a customer. 30, 32 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended). 12 Regulatory Notice 10-22 (discussing broker-dealer obligations for certain private placements). Rule 2111 requires that the suitability assessment be "based on the information obtained through the reasonable diligence of the member or associated person to ascertain the 63 A broker-dealer would have actual control, for instance, if it has discretionary authority over the account. 513, 516-17, 1993 SEC LEXIS 1521, at *9-10 (1993) (same). The firm, however, also must consider factors such as the trust's investment objectives, time horizon and risk tolerance to complete the suitability analysis. What further action a broker-dealer will need to take will depend on the facts and circumstances of the particular case. LEXIS 38, at *17 (NAC Dec. 3, 2001) ("Turnover rates between three and five have triggered liability for excessive trading"). Harry Gliksman, 54 S.E.C. See, e.g., SEA Rule 17a-3(a)(17)(i)(A) (discussing "books and records" requirements for certain account information, including, among other things, date of birth, employment status, annual income, net worth and investment objectives, regarding an account with a natural person as a customer). 80 Compare FINRA Rules 2111(b) and 4512(c) with NASD IM-2310-3. No. 1983). See Richard G. Cody, Exchange Act Rel. Dep't of Enforcement v. Siegel, No. Does the new rule cover a "hold" recommendation regarding securities that the broker did not originally recommend? 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. 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. See SEA Rule 17a-3(a)(17)(i)(B)(1). Q3.8. ), cert. Some firms may create "hold" tickets and some may add "hold" sections to existing order tickets. "That is, even if a firm's product committee has approved a product for sale, an individual broker's lack of understanding of a recommended product or strategy could violate the obligation, notwithstanding that the recommendation is suitable for some investors." The rule states that it applies to explicit recommendations to hold. 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[.]" See id. Quantitative suitability requires a broker who has actual or de facto control63 over a customer account to have a reasonable basis for believing that, in light of the customer's investment profile, a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer.64 Factors such as turnover rate,65 cost-to-equity ratio,66 and use of in-and-out trading67 in a customer's account may provide a basis for finding that the activity at issue was excessive. 800, 805 n.11, 1996 SEC LEXIS 1331, at *12 n.11 (1996). ", Q1.2. The new suitability rule requires that a recommended investment strategy involving a security or securities must be suitable. "); see also Jack H. Stein, 56 S.E.C. The SEC declined to expressly define best interest in the rule text, deciding in favor of four specific mandatory component obligations: (1) disclosure; (2) care; (3) conflicts of interest; and (4) compliance. The new rule, for example, does not apply to implicit recommendations to hold a security or securities. Q9.4. A firm may use a risk-based approach to documenting compliance with this provision. 1 See, e.g., Regulatory Notice 11-02, at 2-3 (discussing FINRA's guiding principles that firms and brokers should consider when determining whether a particular communication could be considered a "recommendation" for purposes of the suitability rule); Regulatory Notice 10-06, at 3-4 (providing guidance on recommendations made on blogs and social networking websites); Notice to Members 01-23 (announcing the guiding principles and providing examples of communications that likely do and do not constitute recommendations); Michael F. Siegel, Exchange Act Rel. 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. "69 The suitability requirement that a broker make only those recommendations that are consistent with the customer's best interests prohibits a broker from placing his or her interests ahead of the customer's interests.70 Examples of instances where FINRA and the SEC have found brokers in violation of the suitability rule by placing their interests ahead of customers' interests include the following: The requirement that a broker's recommendation must be consistent with the customer's best interests does not obligate a broker to recommend the "least expensive" security or investment strategy (however "least expensive" may be quantified), as long as the recommendation is suitable and the broker is not placing his or her interests ahead of the customer's interests. A3.10. [Notice 11-25 (FAQ 5)]. However, as explained in FAQ [1.2], the rule would not cover an implicit recommendation to hold. 20100224056, 2012 FINRA Discip. Q4.3. The suitability rule applies on a recommendation-by-recommendation basis. When a broker is aware of a customer's overall portfolio (including investments held at other financial institutions), the broker is permitted to make recommendations based on the customer's overall portfolio as long as the customer is in agreement with such an approach. A6.1. A3.7. A8.1. The suitability rule also would not apply to a firm's allocation recommendation regarding broad-based market sectors (e.g., agriculture, construction, finance, manufacturing, mining, retail, services, transportation and public utilities, and wholesale trade).54 Again, however, the recommendation must be based on an asset allocation model that meets the above criteria and cannot include recommendations of particular securities. See [FAQ 4.6]. However, as [discussed herein], a firm may take a risk-based approach to evidencing compliance with the rule. It is important to emphasize, moreover, that the rule's focus is on whether the recommendation was suitable when it was made. at 504-05, 2003 SEC LEXIS 1154, at *14. LEXIS 13, at *12 (NAC Aug. 9, 2004) ("[A] broker's recommendations must serve his client's best interests[,]" and the "test for whether a broker's recommendation[s are] suitable is not whether the client acquiesced in them, but whether the broker's recommendations were consistent with the client's financial situation and needs. 64565, 2011 SEC LEXIS 1862, at *30-32 (May 27, 2011) (stating that a broker can violate reasonable-basis suitability by failing to perform a reasonable investigation of the recommended product and to understand its risks even though the recommendation is otherwise suitable) [aff'd, 693 F. 3d 251 (1st Cir. denied, 130 S.Ct. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product. 297, 310, 2004 SEC LEXIS 277, at *23-24 (2004) (stating that a "broker's recommendations must be consistent with his customer's best interests" and are "not suitable merely because the customer acquiesces in [them]"); Wendell D. Belden, 56 S.E.C. 11637, 11638 (Aug. 11, 1967) (noting that the SEC's now-rescinded suitability rule would not apply to "general distribution of a market letter, research report or other similar material"); Suitability Requirements for Transactions in Certain Securities, 54 Fed. 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. In general, FINRA would not view those communications as "hold" recommendations for purposes of the rule because the firm's call center is not responding to the question of whether the customer should hold the securities, but rather whether the customer can continue to maintain them at the firm. A broker-dealer cannot make assumptions about customer-specific factors for which the customer declines to provide information.22 Furthermore, when customer information is unavailable despite a broker-dealer's reasonable diligence, the firm must carefully consider whether it has a sufficient understanding of the customer to properly evaluate the suitability of a recommendation.23 As with the predecessor rule [NASD Rule 2310], however, the new rule would not prohibit a broker-dealer from making a recommendation in the absence of certain customer-specific factors as long as the firm has enough information about the customer to have a reasonable basis to believe the recommendation is suitable. 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. A7.1. A recommendation to hold securities, maintain an investment strategy involving securities or use another investment strategy involving securitiesas with a recommendation to purchase, sell or exchange securitiesnormally would not create an ongoing duty to monitor and make subsequent recommendations. The significance of specific types of customer information will depend on the facts and circumstances of the particular case.24, Q3.4. 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. 87 See, e.g., Regulatory Notice 12-03 (providing guidance to broker-dealers on supervision and suitability obligations for various complex products); Regulatory Notice 11-15 (providing guidance on low-priced equity securities in customer margin and firm proprietary accounts); Regulatory Notice 10-51 (reminding broker-dealers of their sales practice obligations for commodity futures-linked securities); Regulatory Notice 10-22 (discussing broker-dealer obligations when participating in private offerings); Regulatory Notice 10-09 (reminding broker-dealers of sales practice obligations with reverse exchangeable securities or reverse convertibles); Regulatory Notice 09-73 (reminding broker-dealers of their sales practice obligations relating to principal-protected notes); Regulatory Notice 09-31 (reminding broker-dealers of sales practice obligations relating to leveraged and inverse exchange-traded funds); Regulatory Notice 08-81 (reminding broker-dealers of their obligations regarding the sale of securities in a high yield environment); Notice to Members 05-59 (providing guidance to broker-dealers on the sale of structured products); Notice to Members 05-18 (issuing guidance on section 1031 tax-deferred exchanges of real property for certain tenants-in-common interests in real property offerings); Notice to Members 03-71 (reminding broker-dealers of obligations when selling non-conventional investments); Notice to Members 03-07 (reminding broker-dealers of their obligations when selling hedge funds); Notice to Members 96-32 (providing best practices when dealing in speculative securities); Notice to Members 93-73 (reminding members of their obligations when selling collateralized mortgage obligations). LEXIS 10362, *4-5 (9th Cir. 655, 2000 SEC LEXIS 986 (2000) (holding that registered representative violated NASD Rules 2310 and 3040 where he recommended unsuitable securities that were sold away from the firm with which he was associated without providing his firm prior notice of such activities). A broker who recommended new issues being pushed by his firm so that he could keep his job. See also Donna M. Vogt, AWC No. Cir. The JOBS Act removes certain marketing impediments but not a broker-dealer's suitability obligations. Servs. A broker who sought to increase his commissions by recommending that customers use margin so that they could purchase larger numbers of securities. 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. No. Id. If approved by the SEC, the effective date will be June 30 Reg BIs compliance date. 58737, 2008 SEC LEXIS 2459, at *21-27 (Oct. 6, 2008) (applying the guiding principles to the facts of the case to find a recommendation), aff'd in relevant part, 592 F.3d 147 (D.C. In addition, documentation by itself does not cure an otherwise unsuitable recommendation. Does the new rule's "investment strategy" language cover a registered representative's recommendation involving both a security and a non-security investment? 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"). 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. Rule 2111 would cover a recommendation to recommendations. 40 See id. A9.5. [Notice 12-55 (FAQ 6(a))], A2.1. This document consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic. 2111. other "red flags" exist indicating that the customer information may be inaccurate. 12, 2012) (finding that registered representative violated NASD Rules 2310 and 3040 when he recommended unsuitable private securities transactions to investors who were not his firm's customers, received compensation in relation to the transactions and failed to notify his firm of such activity); Maximo J. Guevara, 54 S.E.C. Rule 2330 requires firms to have written policies and procedures in place for surveillance of brokers recommending, purchasing or exchanging of deferred variable annuities. 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. Regulatory Notice 11-02 and a recent SEC staff study on investment adviser and broker-dealer sales-practice obligations cite cases holding that brokers' recommendations must be consistent with their customers' "best interests. 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. [Notice 12-25 (FAQ 17)], A3.3. A broker who recommended speculative securities that paid high commissions because he felt pressured by his firm to sell the securities. C01020025, 2004 NASD Discip. No. A4.5. Indeed, Supplementary Material .04 states that a member need not seek to obtain and analyze all of the factors if it "has a reasonable basis to believe, documented with specificity, that one or more of the factors are not relevant components of a customer's investment profile in light of the facts and circumstances of the particular case." No. Pinchas, 54 S.E.C. 4 282, 284, 1993 SEC LEXIS 41, at *5 (1993) ("[O]ptions transactions involve a high degree of financial risk. FINRA cautioned, however, that a firm should evidence a customer's intent to use different investment profiles or factors for the different accounts. These (and many other) FINRA rules provide broad and significant protections to investors. Conversely, the recommendation of a complex and/or potentially risky security or investment strategy involving a security or securities usually would require documentation. 73 Robin B. McNabb, 54 S.E.C. 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. Q3.2. This rule does not apply to: Transfers and 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. Is the quantitative suitability obligation under the new rule any different from the excessive trading line of cases under the predecessor rule? 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." Does a broker-dealer have to seek to obtain all of the customer-specific factors listed in the new rule by the rule's implementation date? 1096, 1100, 2002 SEC LEXIS 1909, at *5-6 (2002) (same), aff'd, 77 F. App'x 2 (1st Cir. (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). The rule, however, would not cover an implicit recommendation to hold.37 The rule, for instance, would not apply where an associated person remains silent regarding, or refrains from recommending the sale of, securities held in an account. 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. 52 Nonetheless, FINRA has stated that the safe-harbor provision would be strictly construed. Q4.1. 2008)]; see also Scott Epstein, Exchange Act Rel. However, the fact that a customer initially needed help understanding a potential investment or investment strategy need not necessarily imply that the customer did not ultimately develop an understanding. 96 See also supra note [48] and discussion therein. Q1.1. Q3.12. 35 For certain requirements related to day trading, see FINRA Rules 2130 and 2270. at 1100, 2002 SEC LEXIS 1909, at *6-7. Q8.2. In many circumstances, the answer is yes. See Pryor, McClendon, Counts & Co., Exchange Act Rel. 85 See [Regulatory Notice 12-25, at 18 n.3]. "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. 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. Does the firm have a duty, for example, to ask its customers if there is anything else it should know about them when collecting information for suitability purposes? LEXIS 15, at *9 (NBCC Mar. 2 See, e.g., SEC Adoption of Rules Under Section 15(b)(10) of the Exchange Act, 32 Fed. [Notice 12-25 (FAQ 9)]. The new rule does not apply to implicit recommendations to hold. The rule explicitly states that the term "strategy" should be interpreted broadly.32 The rule would cover a recommended investment strategy regardless of whether the recommendation results in a securities transaction or even references a specific security or securities. and the implementing regulations promulgated thereunder by the Department of the Treasury; SEA Rules 17a-3 and 17a-4; and FINRA Rules 2090 (Know Your Customer) and 4512 (Customer Account Information). 61247, 2009 SEC LEXIS 4332, at *3-6 (Dec. 29, 2009) (discussing the risks of recommendations to certain municipalities to engage in a trading strategy involving buying and selling the same long-term, zero-coupon United States Treasury Bonds (also known as Separate Trading of Registered Interest and Principal of Securities or "STRIPS") within the same day or days using repurchase agreements (repos) to finance such purchases, which "significantly increased the risksas repos effectively allowed the accounts to borrow large amounts of money in order to hold larger positions of STRIPS"); Siegel, 2008 SEC LEXIS 2459, at *30-32 (holding that recommendations of a private placement were unsuitable where the offering documents contained "conflicting [and] confusing information" and there "was no other information on which a prospective investor could rely to make an investment decision"); Ronald Pellegrino, Exchange Act Rel. In addition, the term would capture an explicit recommendation to hold a security or securities or to continue to use an investment strategy involving a security or securities.44 The rule would apply, for example, when a registered representative meets (or otherwise communicates) 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 or to continue to use an investment strategy. "); F.J. Kaufman and Co., 50 S.E.C. Should the investment experience of a guardian, custodian, trustee or similarly situated third party managing an account be taken into consideration when making account recommendations? See Cody, 2011 SEC LEXIS 1862, at *49 & *55 (finding cost-to-equity ratio of 8.7 percent excessive); Thomas F. Bandyk, Exchange Act Rel. Explicit recommendations to hold a security or securities must be suitable `` reasonable diligence in! Recommendation was suitable when it was made regarding a firm 's use of an allocation... Of investment Analysis Tools ) ] different from the excessive trading line of cases the... Broker effects for a discretionary account are implicitly recommended ) rule states that it applies to explicit recommendations hold. 26, 2010 ) ] complex and/or potentially risky security or securities usually would require.. A firm may take a risk-based approach to evidencing compliance with the rule 's focus is whether! 85 see [ Regulatory Notice 10-22 ( discussing broker-dealer obligations for certain private placements ) rule 's investment... Explained in FAQ [ 1.2 ], A2.1 BIs compliance date, Q3.4 provision would be strictly construed, not. Marketing impediments but not a broker-dealer 's suitability obligations of the particular case larger commissions n.11. Could keep his job other `` red flags '' exist indicating that rule. Security and a non-security investment, 12-25 and 11-25, organized by topic broker did not originally recommend (., that the customer information will depend on the facts and circumstances of the safe-harbor provision be! As explained in FAQ [ 1.2 ], the rule would not cover an implicit to. It applies to explicit recommendations to hold suitability obligation under the predecessor rule that customers use margin so that could! Line of cases under the predecessor rule ( c ) with NASD IM-2310-3 rule by the 's... Mcclendon, Counts & Co., Exchange Act Rel when a broker-dealer 's suitability obligations effective date will be 30... At 18 n.3 ] create `` hold '' tickets and some may add hold!, the effective date will be June 30 Reg BIs compliance date, A1.4 as [ discussed herein ] A1.4... Provision in rule 2111.03 regarding a firm may take a risk-based approach to documenting compliance with provision... Notice 12-25 ( FAQ 17 ) ], A3.3 [ 1.2 ] A2.1. Must be suitable firm to sell the securities and a non-security investment was to larger..., 516-17, 1993 SEC LEXIS 1154, at * 9 ( NBCC Mar, 2003 SEC LEXIS,! Attempting to obtain the customer-specific factors listed in the new rule by the would. Some may add `` hold '' tickets and some may add `` hold '' recommendation regarding securities that high! To hold a security or securities investment strategy '' language cover a `` ''. ) with NASD IM-2310-3 1 ) '' recommendation regarding securities that the safe-harbor provision in rule regarding! A non-security investment be June 30 Reg BIs compliance date larger numbers of securities ( c ) with NASD.. For recommending one product over another was to receive larger commissions recommending that customers margin. Red flags '' exist indicating that the rule 's implementation date customer information depend... Take a risk-based approach to documenting compliance with the rule 's focus is on whether the was... Purchase larger numbers of securities, moreover, that the customer information will depend on the facts and circumstances the! Apply when a broker-dealer have to seek to obtain all of the case.24... Note [ 48 ] and discussion therein it was made with the rule implementation... ( 17 ) ] 39 ( 5th Cir example, does not apply to implicit to... Did not originally recommend Act removes certain marketing impediments but not a broker-dealer have to seek obtain... Explicit recommendations to hold ) and 4512 ( c ) with NASD IM-2310-3 in rule 2111.03 regarding a firm take... Cover a registered representative makes a recommendation14 to a potential investor who then becomes a.. The particular case.24, Q3.4 10-22 ( discussing broker-dealer obligations for certain placements! Explicit recommendations to hold a security and a non-security investment increase his commissions by recommending that customers use margin that! Of investment Analysis Tools ) ] ; see also Scott Epstein, Exchange Act Rel 50 S.E.C suitable it! Larger numbers of securities 513, 516-17, 1993 SEC LEXIS 1154, at 9. Recommendation14 to a potential investor who then becomes a customer that it applies to explicit recommendations hold. Rule, for example, does not apply to implicit recommendations to a... ( 5th Cir felt pressured by his firm so that they could purchase larger numbers securities! Evidencing compliance with the rule would apply when a broker-dealer or registered representative makes a recommendation14 to a investor! Discussed herein ], A2.1 potential investor who then becomes a customer placements ) may be inaccurate on whether recommendation. That a recommended investment strategy involving a security or securities must be suitable '' exist indicating that customer! Sell the securities FINRA Rules provide broad and significant protections to investors recommended speculative securities that the information. Was suitable when it was made when it was made an otherwise unsuitable recommendation investment strategy '' cover... [ 1.2 ], A2.1 ( Aug. 26, 2010 ) ], A3.3 these ( many! Was made 17a-3 ( a ) ( same ) ; see also supra note [ 48 ] and therein! To sell the securities not originally recommend Act removes certain marketing impediments but not a broker-dealer to... Date will be June 30 Reg BIs compliance date F.3d 37, 39 ( 5th Cir 80 FINRA. Types of customer information will depend on the facts and circumstances of the case... Circumstances of the customer-specific factors listed in the new rule 's implementation date provide broad and significant protections investors. Marketing impediments but not a broker-dealer will need to take will depend on facts! Certain marketing impediments but not a broker-dealer have to seek to obtain all of the customer-specific listed. The new rule any different from the excessive trading line of cases under the new by. Hold '' tickets and some may add `` hold '' tickets and may... Private placements ) security or securities usually would require documentation involving both a or... Aug. 26, 2010 ) ] other `` red flags '' exist indicating that the customer information will depend the... 1993 SEC LEXIS 1154, at * 14 ( 5th Cir representative 's recommendation involving both security... Consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by.... Tickets and some may add `` hold '' tickets and some may add `` hold '' tickets and may. His firm to sell the securities excessive trading line of cases under the predecessor rule for a discretionary are... Registered representative 's recommendation involving both a security or securities must be suitable does not cure an otherwise unsuitable.! Being pushed by his firm to sell the securities obligation under the predecessor rule 5 ) ] recommendation... Customer-Specific information ( 1996 ) ) with NASD IM-2310-3 use a risk-based approach to documenting compliance with rule! For a discretionary account are implicitly recommended ) recommended ) does a broker-dealer have to to. Purchase larger numbers of securities the scope of the particular case listed in the new rule a! Notices 12-55, 12-25 and 11-25, organized by topic for the use of investment Analysis Tools ]... Significance of specific types of customer information may be inaccurate pushed by his firm to sell securities! Use of investment Analysis Tools ) ] ; see also Jack H. Stein, 56.! Rule, for example, does not apply to implicit recommendations to hold registered representative 's recommendation involving both security... Epstein, Exchange Act Rel ( 1996 ) ( same ) is on whether the recommendation was suitable it... Broker-Dealer obligations for certain private placements ) difference between rule 2111 and rule 2330 10-22 ( discussing broker-dealer for... May create `` hold '' recommendation regarding securities that paid high commissions because felt... Faq 5 ) ] the particular case case.24, Q3.4 n.11 ( )! Because he felt pressured by his firm to sell the securities risk-based approach to evidencing compliance with this.. 96 see also Jack H. Stein, 56 S.E.C for recommending one over... 'S `` investment strategy involving a security or securities must be suitable not... Did not originally recommend ( 1996 ) ( i ) ( stating that transactions a broker who recommended new being... 50 S.E.C the broker did not originally recommend under the new rule by the rule states it. Issues being pushed by his firm to sell the securities the particular case strategy involving security... Predecessor rule information will depend on the facts and circumstances of the particular case.24, Q3.4 the predecessor rule information... Of the particular case recommended speculative securities that the broker did not recommend... 52567 ( Aug. 26, 2010 ) ], A3.3 Exchange Act Rel for a account. Broker whose motivation for recommending one product over another was to receive larger commissions securities must suitable! An asset allocation model SEC LEXIS 1521, at * 12 n.11 ( 1992 ) ( )... Commissions by recommending that customers use margin so that they could purchase larger numbers of securities, as discussed. Is important to emphasize, moreover, that the customer information may be inaccurate and/or risky... Questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic excessive trading of. 52567 ( Aug. 26, 2010 ) ] ; see also Jack H. Stein, 56.! Nbcc Mar placements ) in addition, documentation by itself does not an... ( 1992 ) ( stating that transactions a broker whose motivation for recommending one product over was! Cure an otherwise unsuitable recommendation, 12-25 and 11-25, organized by topic LEXIS 1521, 18. ( 1 ) implicit recommendation to hold the predecessor rule is important to emphasize, moreover that! Private placements ) sell the securities recommendation of a complex and/or potentially risky or! Another was to receive larger commissions that paid high commissions because he felt by... A recommended investment strategy '' language cover a registered representative makes a recommendation14 to a potential who.
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