New FINRA Rules Effective July 2012
In 2011, the Securities and Exchange Commission (SEC) approved two new rules, both modifications of existing rules, that were proposed by the Financial Industry Regulatory Authority (FINRA). FINRA is the largest independent regulator of the U.S. securities industry (previously known as the National Association of Securities Dealers, or NASD). As summarized in its mission statement, “FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.”
Rules 2090 and 2111 (described below under More about the Rules), expand upon previous industry regulations. As a result, your financial representative may need to ask you for updated or additional information in order to ensure he or she is in full compliance with the new rules.
What type of information might I need to provide to my financial representative, and why?
Included in the information that must be collected and maintained in order to comply with the new rules are a customer’s risk tolerance, liquid net worth, account liquidity needs andinvestments held elsewhere. Your representative will explain to you the exact information needed.
How can I ensure I’m protected?
There are a number of steps you can take to help protect yourself and your information. When providing information or discussing your account over the phone, be absolutely certain you are speaking with your representative or someone from their office. If you ever suspect that an individual who has called you is not from your representative’s office, simply tell them you need to call back, then hang up and call the office using the number you have on file.
Other steps you can take to help protect yourself and your information can be found here on our Security page. Additional resources to help protect against fraud, scams and identity theft can be found on the following websites:
More about the Rules
FINRA Rules 2090 and 2111 are two interrelated rules that are modifications of two former rules, NYSE 405 and NASD 2310, but also expand on those rules. By requiring firms, or “members,” to collect and maintain a range of information about customers’ financial status and account needs, these rules are designed to help ensure that financial representatives have the information necessary to make recommendations that are suitable to their individual customers.
Below is the wording of the new rules. Complete details and background information on the rules can be found in FINRA’s Regulatory Notice 11-25. Though this language is geared toward industry professionals rather than individual investors, it may help you understand the essence of the rules.
Rule 2090 (Know Your Customer) Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.
Rule 2111 (Suitability) (a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities 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. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation. (b) A member or associated person fulfills the customer-specific suitability obligation for an institutional account, as defined in NASD Rule 3110(c)(4), if (1) the member or associated person has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating the member’s or associated person’s recommendations. Where an institutional customer has delegated decision-making authority to an agent, such as an investment adviser or a bank trust department, these factors shall be applied to the agent.
Please contact your financial representative if you have questions.