Financial Industry Regulatory Authority Inc.’s Rule 2111 covers general suitability for recommended transactions and investment strategies involving securities. The regulation essentially requires that brokers perform reasonable due diligence to understand the nature of the recommended strategy or securities product and whether it’s suitable. Brokers also must determine suitability on consumer-specific and quantitative levels.
Finra has noted that Rule 2111 also will now apply to “hold” strategies — situations in which brokers advise a client to stick with a security or an investment strategy. This is a positive step in the right direction. Brokerage firms often defend cases where a security was purchased by a previous brokerage firm by claiming that it has no obligation to determine whether the holding of that security is currently suitable. Rule 2111 will now dictate that advisors do have this requirement.
In practice, this means brokers will have to update clients’ information to ensure that the decision to stay in an investment is still appropriate. Hypothetically, if a client has held on to a variable annuity for 10 years, a recommendation that he or she stick with it will require the broker to go over the customer’s information and make sure his or her risk profile allows for it and that it still makes economic sense.
The foregoing information has been provided by The White Law Group, a national securities fraud, securities arbitration and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.