Are you prepared for FINRA Rules 2090 and 2111?
September 8, 2011
Insurance Technologies continues to monitor new and upcoming regulations within the financial service industry in order to enhance our product offerings to help our clients with compliance. Two new regulations proposed in 2010 by the Financial Industry Regulatory Authority (FINRA) that Insurance Technologies is watching are FINRA Rules 2090 (Know your Customer) and 2111 (Suitability). These new SEC approved FINRA rules are scheduled to be effective in 2012 and will have a strong impact on Broker Dealers.
FINRA Rule 2090 and Rule 2111 were created to govern suitability and know your customer obligations to ensure investor protection, fair dealing with customers and promote ethical sales practices. It is important for Broker Dealers to prepare for these upcoming rules and start implementing the necessary procedures to prepare their Advisors.
Insurance Technologies continues to collaborate with current Broker Dealer clients to identify the best practices to meet these regulations. Please contact us, to learn how Insurance Technologies sales solutions can assist your company in meeting these upcoming FINRA rules.
FINRA Rule 2090 (Know Your Customer)
Regulation requires that the Advisor know (and retain) “essential facts” concerning every customer from the initiation of the customer-broker relationship. The essential facts are those required to:
- Effectively service the customer’s account,
- Act in accordance with any special handling instructions for the account,
- Understand the authority of each person acting on behalf of the customer, and
- Comply with applicable laws, regulations, and rules.
• “The know-your-customer obligation arises at the beginning of the customer-broker relationship and does not depend on whether the Broker has made a recommendation.”
• Discussion of frequency of updating information on client: 36 month maximum between updates of account information for client.
FINRA Rule 2111 (Suitability)
Regulation requires that the firm and Advisor “have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”
Main Suitability Obligation:
- Reasonable basis that the investment would be good for at least some investors
- Reasonable basis that the investment is good for the specific customer
- Reasonable basis that a series of investments are not excessive
The rule makes it clear that the Broker must have a firm understanding of both the customer and the product. Otherwise, they are in violation of the rule.
- FINRA’s guiding principles relevant to determining whether a particular “communication” could be viewed as a recommendation for suitability rules.
- Communications content context and presentation determine whether a “recommendation” has been made.
- “The more individually tailored the communication is to a particular customer or customers about a specific security or investment strategy, the more likely the communication will be viewed as a recommendation.”
- A series of individual actions my not constitute a recommendation when viewed individually, but when viewed as a whole, could be.
- Broad interpretation of the word “Strategy”
- The rule applies whether or not a recommendation results in a transaction
- “FINRA, however, exempted from the new rule’s coverage certain categories of educational material – which the strategy language otherwise would cover – as long as such material does not include (standing alone or in combination with other communications) a recommendation of a particular security or securities. FINRA believes that it is important to encourage firms and associated persons to freely provide educational material and services to customers.”
The Customer’s Investment Profile is the key and includes, but is not limited to:
- Other Investments/Holdings
- Financial Situation and Needs
- Tax Status (Marginal Rate and Filing Status)
- Investment Objectives
- Investment Experience
- Investment Time Horizon
- Liquidity Needs
- Risk Tolerance
- Any other information disclosed to the member (Broker Dealer) or Advisor
Advisor must use “reasonable diligence” to capture all of the above about the client.
If not captured, the Advisor must disclose and document, with specificity, why it is not relevant to the transaction.
Customer’s Investment Profile
The information provided above is a summary of FINRA Rule 2090 and FINRA Rule 2011 provided by Insurance Technologies. For full FINRA descriptions of the proposed rule changes, visit www.finra.org.