11.2 FINRA & MSRB Suitability Requirements

10.2 on SIE

FINRA requires firms to evaluate if a recommendation is suitable by collecting following info

• age

• time horizon

• liquidity needs

• risk tolerance

• tax status

• current and future financial needs

• investment experience

suitability questionnaire should be given at account opening and kept in customers file. updated every 36 months

FINRA three components regarding suitability obligations

1. reasonable-basis obligation: firm and rep understand complexity and risk of security or investment strategy

2. customer-specific obligation: broker-dealer must believe that a recommendation is suitable for the particular customer based on customers personal and investment profile

3. quantitative suitability obligation: broker-dealer must believe that a series of recommended securities transactions is not excessive

suitability analysis must be conducted before rep an make any recommendations. can accept unsolicited orders from customer who has not provided info

FINRA suitability rules for institutional customers

if the firm believes the customer can evaluate risk and has stated that it is acting independently, that meets suitability requirements

MSRB additions to FINRA and SEC regarding suitability info

• must determine tax status by asking for tax bracket and state of residence

• if customer refuses to disclose info, no recommendations can be made but unsolicited trades may be accepted

• if rep feels unsolicited trade is unsuitable customer must be informed. if they insist trade is allowed just marked unsolicited

regulation BI

SECs reg best interest requires broker dealers and their associated persons to act in their retail customers best interest

reg BI retail customer qualifications

• natural person (not corporation) or a natural persons legal rep (trustee or executor)

• customer receives a recommendation from a broker-dealer about any securities or any strategy involving securities

• customer uses recommendation primarily for their personal investing (or family or household)

• this can include accredited investors

what is a recommendation under reg BI

statements involving a call to action. simply discussing or providing general info is not a recommendation

reg BI 4 obligations for broker dealers

1. disclosure obligation

2. care obligation

3. conflict of interest obligation

4. compliance obligation

disclosure obligation

requires firms before or at time of making a recommendation to provide in full writing and fair disclosure the following material facts

• firm is acting in broker dealer capacity

• material fees and costs

• type and scope of services provided

• any material limitations on securities or investment strategies

• all material facts relating to conflicts of interest associated w a recommendation

care obligation

literally the same as FINRAs three components of suitable recommendations

conflict of interest obligation

• identify and mitigate conflict that might create an inventive for a broker dealer to put its interests ahead of the customers

• indentify and disclose material limitations on offerings (ex: only offering one type of fund) and prevent the limitations from putting the firms interests ahead of the customers

• identify and eliminate all sales contests, quoatas, bonuses, and noncash compensation that is based on the sales of specific securities

compliance obligation

requires broker dealers to establish, maintain, and enforce written policies and procedures designed the achieve compliance with reg BI

form CRS

broker dealers and investment advisors are required to deliver a summary of their relationship with a customer. includes

• relationship and services

• fees and costs

• conflicts of interest

• standards and conduct

• disciplinary history of firm and its professionals

• how a customer can obtain additional info on the firm

this form should be received before or at the time of the first recommendation, transaction, order, or account opening.

filed with FINRA gateway. changes must be sent to exisitng customers within 60 days. must be provided upon requires and posted prominently on broker dealers website.

customer order verification

when taking an order from a customer the firm must be able to verify the customers identity

• for phone orders if rep personally knows customer this is verification

• if over phone to call center security questions must be asked

• if placed online can only be accepted after customer logs into account where email and password can be verifies

  • orders placed by other means cant be accepted

transaction confirmation deadline and errors

customers must be send written confirmation of each transaction prior to settlement. if there are errors the firm must send a corrected confirmation

quarterly statements timeline

customers must receive quarterly statements showing all positions at current market value. does not need to be sent for a quarter with no balance or securites in account. if customer owns penny stocks then statements must be sent monthly

business continuity plan

must be posted on firms website and mailed to customers upon request

red flag recommendations to seniors

• variable annuities, equity indexed-annuities, real estate limited partnerships

• variable life settlements

• complex structured procuts like collateralized debt obligations (CDO)

• recommendation to mortgage their residence to obtain funds for investment purposes

• recommendation to use retirement savings including early withdrawls from IRAs to invest in high risk investment

trusted contact person

make reasonable efforts to obtain the name and contact info for a trusted contact person when opening an account for a senior. must disclose in writing to the client that the firm will be authorized to contact the truster contact person to

• disclose info about cleints account to address possible financial exploitation

• confirm specifics of the clients current contact info or health status

• obtain identiy of any legal guardian, executor, trustee, or holder of a power of attorney

investors who FINRA believes are particulary susceptible to financial exploitation

• 65 or older

• 18 or older where the member believes the individual has a mental or physical impairment that makes them unable to protect their own interests

vulnerabel individuals are called specified adults

actions if financial exploitation is suspected

• immeidately report to appropriate person within firm

• may place 15 business day hold on disbursement of funds from account (only suspicious ones, not routine ones like bills)

• if members review supports the belief the client is being exploited the member can extend the temporary hold for another 10 business days

• if the activity becomes part of a state or federal investigation an additional hold of 30 days can be added

• member must document reasoning behind all holds and notify the trusted contact person assuming they are not the exploiter

error in confirmation

firm must send corrected confirmation to customer, must pay actual price trade was executed at

error in execution

original trade is canceled and rebilled in correct amount, customer receives 2 new confirmations, customer must be actual price at which trade was executed

error in client instructions

client is obligated to accept trade

how to transfer account

fill out transfer initiation form TIF at firm that will be receiving assets which will enter request into automated customer account transfer service ACATS. current firm has one business day to validate or take exception to transfer and then 3 business days to complete transfer, all open orders will be canceled at current firm (unless options that expire within 7 days) and new orders must be sent to new firm