I'm a compliance officer for a small brokerage firm. I'm a little confused by FINRA's new suitability rule. What, if anything, extra does it require us to do?
- E.S., Florida
To get a better idea of what is required under FINRA's new suitability rule, Rule 2111, which went into effect on July 9, 2012, your best bet is to read Notice to Members 12-25. The notice not only explains the rule, but also provides answers to some frequently asked questions.
In reality, there's probably very little extra work you need to do if you've already been following the interpretations and case law associated with the old rule, since it retains the core features and codifies the interpretations of the previous suitability rule.
The new rule, for example, codifies and clarifies the three main suitability obligations that were previously discussed in case law. First, there is reasonable-basis suitability. Under that obligation, you must 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.
Next is customer-specific suitability, in which you must have a reasonable basis to believe that your recommendation is suitable for the particular customer based on the customer's investment profile.
Finally, there is quantitative suitability. Here, a broker who has control over a customer account must have a reasonable basis to believe that a series of recommended securities transactions are not excessive.
The new rule also broadens the explicit list of customer-specific factors that you should obtain from your clients. These items, however, are things that most brokerage firms already request, such as age, investment experience, time horizon, liquidity needs and risk tolerance.
It should be noted that the new rule provides that you need not seek to obtain and analyze all of the factors if you have "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." If you reasonably determine that certain factors do not require analysis with respect to a category of customers or accounts, then you could document the rationale for this decision in your procedures.
My old brokerage firm went after me for money owed on a promissory note. I lost the case but can't pay the award. FINRA is now trying to suspend my license. I've been in the industry all my life and don't know how I'd make a living if I lose my license. Is there anything I can do?
- N.S., California
You should immediately consult with an attorney who is experienced in these matters and seek a hearing with the National Adjudicatory Counsel (NAC). It's important that you get an attorney who knows what they're doing, since there are differences between summary suspension proceedings and proceedings before a hearing officer.
In addition, there are differences in the types of defenses permissible when an arbitration award involves a customer versus those involving a former employer. Briefly, you should be able to present various defenses, including a bone fide inability to pay; an agreement to make installment payments; the filing of a timely motion to vacate or modify the arbitration award which has not been denied; or that you've filed a petition in bankruptcy which is pending or has been discharged. Unfortunately, situations like this are all too common. Registered reps have an extremely difficult time trying to win these sorts of arbitrations and, in the vast majority of cases, they have already spent the money they received when they were hired.
Whenever I'm consulted beforehand, I always advise the broker to set aside the money he or she is given with these promissory notes and only withdraw the amount that's forgiven each year. That way, if the worst happens, the broker can simply write a check and be done with the matter. Regrettably, that requires the sort of budgeting and fiscal discipline that few people have.
Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: this email address.