It has entered into a number of AWCs concerning variable annuities with other members over the years. [Notice 12-25 (FAQ 21)], A3.11. [Notice 12-25 (FAQ 2)], A1.1. Thus, VALICs later reviews for inappropriate rates of exchange lacked complete information. In addition, FINRA explained that, where a firm allows a customer to use different investment profiles or factors for different accounts rather than using a single customer profile for all of the customer's accounts, a firm could not borrow profile factors from the different accounts to justify a recommendation that would not be appropriate for the account for which the recommendation was made. The supervisory review and approval process. Read a copy of the award here. For purposes of this Rule, documents may be created, stored, and transmitted in electronic or paper form, and signatures may be evidenced in electronic or other written form. [Notice 12-55 (FAQ 10(b)]. A broker can violate reasonable-basis suitability under either prong of the test. 9, 2004) (suspending registered representative for six months and ordering him to pay restitution of more than $15,000 for recommending that a retired couple use liquefied home equity to purchase a variable annuity). 9 See FINRA Rule 0160(b)(4) (Definition of Customer). Other firms may require emails or memoranda to supervisors or emails or letters to customers copying supervisors. The answer depends on the facts and circumstances of the particular case. 30 See supra note [22] and cases cited therein. For purposes of using a risk-based approach to documenting compliance with suitability obligations, what types of recommendations does FINRA generally consider complex or potentially risky? ; Regulatory Notice 11-02, at 4-5. Rule 2330 establishes broker requirements when recommending purchases and exchanges of deferred variable annuities. Once the owner reaches retirement age, they can elect to receive a lump-sum payment or periodic payments until the annuity runs out of money. "); Paul C. Kettler, 51 S.E.C. 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? 1996) (same); Robert L. Wallace, 53 S.E.C. See FINRA Rule 2111.03. Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? Nothing in this paragraph shall relieve a member from its obligations under FINRA rules and the federal securities laws, including but not limited to, Rule 2232 and SEA Rule 10b-10. In addition, the broker-dealer "must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including[,] where circumstances warrant, prohibiting the activity." A broker whose motivation for recommending one product over another was to receive larger commissions. 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. Registered representatives can fulfill Continuing Education requirements, view their industry CRD record and perform other compliance tasks. [Notice 12-55 (FAQ 6(a))], A2.1. For purposes of this Rule, the term "registered principal" shall mean a person registered as a General Securities Sales Supervisor (Series 9/10), a General Securities Principal (Series 24) or an Investment Company Products/Variable Contracts Principal (Series 26), as applicable. .01 Depositing of Funds by Members Prior to Principal Approval. Where a broker did not recommend the original purchase of a security but explicitly recommends that the customer subsequently hold that security, the new suitability rule would apply. The suitability rule would not apply, for instance, if a registered representative recommends a non-security investment as part of an outside business activity and the customer separately decides on his or her own to liquidate securities positions and apply the proceeds toward the recommended non-security investment.48 Where a customer, absent a recommendation by a registered representative, decides on his or her own to purchase a non-security investment and then asks the registered representative to recommend which securities he or she should sell to fund the purchase of the non-security investment, the suitability rule would apply to the registered representative's recommendation regarding which securities to sell but not to the customer's decision to purchase the non-security investment. See, e.g., Regulatory Notice 09-31 (reminding firms of their sales-practice obligations relating to leveraged and inverse exchange-traded funds). 47 See Notice to Members 05-50, at 5 ("[R]ecommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity, or variable life contract must be suitable, including where such liquidations or surrender[s] are for the purpose of funding the purchase of an unregistered [equity indexed annuity]."). For instance, as long as the supervisory system is reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules, a firm could focus on the detection, investigation and follow-up of "red flags" indicating that a registered representative may have recommended an unsuitable investment strategy with both a security and non-security component.94 A registered representative's recommendation that a customer with limited means purchase a large position in a security might raise a "red flag" regarding the source of funds for such a purchase. Proposed Rule Change FINRA is proposing to adopt certain paragraphs, as specified below, of NASD Rule 2330 (Customers' Securities or Funds) as FINRA Rule 2150 (Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) in the consolidated FINRA rulebook taking into account certain provisions of To the extent that a broker-dealer or associated person is recommending a purchase or exchange of a deferred variable annuity to a retail customer, Reg BI's obligations . 52 Nonetheless, FINRA has stated that the safe-harbor provision would be strictly construed. As FINRA has stated previously, "FINRA appreciates that no two [broker-dealers] are exactly alike. Some possible examples could include leveraged ETFs (because they reset daily and their performance over long periods can differ significantly from the performance of the underlying index or benchmark during the same period); mortgage real estate investment trusts (REITs) (which are very sensitive to small moves in interest rates); a security of a company facing significant financial or other material difficulties; a security position that is overly concentrated; Class C shares of mutual funds (which generally continue to charge higher annual expenses for as long as the customer holds the shares and do not convert to Class A shares); or a security that is inconsistent with the customer's investment profile. It notes that the previous FINRA Rule 2330 was adopted to address concerns that customers were confused about when to exchange one variable annuity for another. UBIS is headquartered in Glendale, California, and has been a FINRA member since 1984. 53 FINRA Rule 2111.03. 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[. 7230A. Trade Report Input | FINRA.org Corp., AWC No. .06 Sharing of Office Space and/or Employees. If you suffered investment losses after your broker recommended variable annuity switching without properly disclosing any risks, your broker may have violated the rule. 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." Quiz & Worksheet: Members' Obligations Concerning Deferred Variable Firms should understand that the use of any such Institutional Suitability Certificate in no way constitutes a safe harbor from the rule. Trade Reporting Participation Requirements Up 7340. Utah Firm Executed Unnecessary Transaction. [Notice 11-25 (FAQ 7)]. In general, the focus remains on whether the recommendation was suitable at the time when it was made. 91 Firms are reminded, however, that copies of all communications relating to their business as such and memoranda of brokerage orders are required to be preserved for three years. This position is consistent with requirements under the previous suitability rule. FINRA Rule 2111 (Suitability) FAQ | FINRA.org 2330. Members' Responsibilities Regarding Deferred Variable - FINRA.org FINRA expects a firm to be capable of explaining how an asset allocation model that it uses is consistent with generally accepted investment theory. 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. "); Paul C. Kettler, 51 S.E.C. FINRA IS A REGISTERED TRADEMARK OF THE FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC. FINRA Amends Its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest, Sales Practice Obligations With Respect to Oil-Linked Exchange-Traded Products, Proposed Rule Change to FINRAs Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest, FINRA operates the largest securities dispute resolution forum in the United States, To report on abuse or fraud in the industry. Rule 2330 FINRA Rule ________ requires that a member representative have a reasonable basis to believe that the variable annuity transaction is suitable for the customer before recommending the purchase or exchange of a variable annuity. PDF Order Approving Proposed Rule Change to Adopt FINRA Rule 2150 (Improper 2008015078603 (Nov. 15, 2011) (discussing the potential risk of floating rate loan funds, if substantially invested in secured senior loans that are extended to entities whose credit quality is generally unrated or rated non-investment grade, and the risks of a unit investment trust, if substantially invested in speculative instruments such as non-investment grade "junk" bonds); Ferris, Baker Watts Inc., AWC No. 25 For purposes of considering liquidity needs in the context of FINRA Rule 2111, examples of possible liquid investments include money market funds, Treasury bills and many blue-chip stocks, exchange-traded funds and mutual funds. Unit 9 Insurance Company Products Flashcards | Quizlet 20452 (Apr. Dec. 1, 2014. Firms do not have to document or individually approve every "hold" recommendation.91 As with recommendations of other types of investment strategies or of purchases, sales or exchanges of securities, firms may use a risk-based approach to documenting and supervising "hold" recommendations. [Broker-dealers] have different business models; offer divergent services, products and investment strategies; and employ distinct approaches to complying with applicable regulatory requirements. "); F.J. Kaufman and Co., 50 S.E.C. A deferred annuity is a contract with an insurance company that generates income later used to fund the owners retirement. Firms must attempt to obtain and analyze relevant customer-specific information. FINRA previously has provided guiding principles that firms and registered representatives could consider when determining whether a particular communication could be viewed as a recommendation for purposes of the suitability rule. Members shall develop and document specific training policies or programs reasonably designed to ensure that associated persons who effect and registered principals who review transactions in deferred variable annuities comply with the requirements of this Rule and that they understand the material features of deferred variable annuities, including those described in paragraph (b)(1)(A)(i) of this Rule. Some customers may be reluctant to provide certain types of information to their broker-dealers. A firm should educate its associated persons on the potential risks and rewards of the products that the firm permits them to recommend. 30, 32 n.11, 1992 SEC LEXIS 2750, at *5 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended). 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. UnionBanc Investment Services, LLC Fined by FINRA - Glendale Q3.10. FINRA IS A REGISTERED TRADEMARK OF THE FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC. As noted above in the answer to [FAQ 8.1], FINRA has not endorsed or promoted any certificate. Although such holdings continue to act as precedent regarding those issues, the new rule does not broaden the scope of implicit recommendations. "); see also Jack H. Stein, 56 S.E.C. 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. No. Under Rule 2330, a member that is permitted to maintain customer funds under SEA Rules 15c3-1 and 15c3-3 may, prior to the member's principal approval of the deferred variable annuity, deposit and maintain customer funds for a deferred variable annuity in an account that meets the requirements of SEA Rule 15c3-3. Rule 2330 requires that the member or person associated with a member consider whether the customer has had another deferred variable annuity exchange within the preceding 36 months. March 13, 2020 By Mark Schoeff Jr. Finra has proposed a rule that would clarify when the current suitability standard for brokers will be superseded by a new broker advice rule set to be. Member Agreements and Contracts. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product." The new rule does not apply to implicit recommendations to hold. .02 Review by FINRA's Advertising Regulation Department. 513, 515, 1993 SEC LEXIS 1521, at *5 (1993) (discussing risky nature of investing in a company that had a history of operating losses and concentrated its assets in illiquid holdings in other unproven start-up companies in the same industry); Gordon S. Venters, 51 S.E.C. [Notice 11-25 (FAQ 5)]. A3.7. That will not always be the case, however. This must be done before sending the application to the issuing insurance company. 6 Pub. 2130. Obtaining an Order of Expungement of Customer Dispute - FINRA.org "Hypothecation of Customers' Securities" See SEC Rules and Regulation T Tab. The rule also explicitly covers recommended investment strategies involving securities, including recommendations to "hold" securities. FTS failed to disclose that the existing variable annuity had an accrued living benefit value or understated the living benefit value, which the customer would forfeit upon executing the proposed exchange. 46 FINRA made similar points regarding recommended investment strategies on several occasions under the predecessor suitability rule. Examples of FINRA Rule 2030 in a sentence. 2018060548501. A firm's analysis of whether the identification of a more limited universe of fixed-income securities constitutes a recommendation of particular securities may, depending on the facts and circumstances, differ from its assessment regarding equity securities. 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. If a customer is either generally not capable of evaluating investment risk or lacks sufficient capability to evaluate the particular product or investment strategy that is the subject of a recommendation, the scope of a broker's customer-specific obligations under the suitability rule would not be diminished by the fact that the broker was dealing with an institutional customer. As a general matter, these terms are to be understood commensurate with their meaning in financial analysis. Q3.5. 471, 475, 1999 SEC LEXIS 2685, at *7 (1999). [Notice 12-25 (FAQ 17)], A3.3. No. NASD Rule 2130 has been superseded by FINRA Rule 2080. FINRA has stated that the new suitability rule does not broaden the scope of implicit recommendations applicable to the predecessor rule. Finally, the rule provides a modified institutional-customer exemption. 45402, 2002 SEC LEXIS 284, at *20-21 & n.10 (Feb. 6, 2002) (holding that the defendant broker "controlled" the account because he essentially was a co-conspirator with the institutional customer's investment officer, who was authorized to place orders for the institutional customer's account). A broker's use of in-and-out trading ordinarily is a strong indicator of excessive trading. Thus, identifying a more limited universe of debt issuers may not constitute a recommendation if such issuers have many debt securities outstanding, of many maturities, and having distinct structures or features. (i) the customer has been informed, in general terms, of various features of deferred variable annuities, such as the potential surrender period and surrender charge; potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59; mortality and expense fees; investment advisory fees; potential charges for and features of riders; the insurance and investment components of deferred variable annuities; and market risk; (ii) the customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit; and, (iii) the particular deferred variable annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or exchange of the deferred variable annuity, and riders and similar product enhancements, if any, are suitable (and, in the case of an exchange, the transaction as a whole also is suitable) for the particular customer based on the information required by paragraph (b)(2) of this Rule; and, (B) in the case of an exchange of a deferred variable annuity, the exchange also is consistent with the suitability determination required by paragraph (b)(1)(A) of this Rule, taking into consideration whether.

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