TAG | Dodd-Frank Act
Comments off · Posted by Securities Lawyer in FINRA
There will be a major revamping of suitability mandates effective July 9, 2012, that has some in the broker-dealer world worried about much broader obligations to oversee customer accounts and investment strategies, writes Dan Jamieson in an article from InvestmentNews.com, July 5, 2012.
There will be a rule which requires brokers to perform reasonable diligence on products, understand those investments, and have a reasonable basis to believe that a security or investment strategy is suitable. It also adds age, investment experience, time horizon, liquidity needs and risk tolerance to the list of factors that affect a suitability determination.
Jameison writes that the most concern to broker-dealers, is that the rule imposes suitability obligations on investment strategies. In this rule filing, FINRA, the Financial Industry Regulatory Authority Inc., said the term “investment strategy” would be interpreted broadly and cover a recommendation to hold an investment as well as a “buy” or “sell” recommendation. This rule was approved by the SEC in November 2010. Implementation was delayed to July 9, 2012, to give the industry time to prepare.
The InvestmentNews.com article adds that adding to concerns is the May guidance from Finra (Regulatory Notice 12-25), which laid out a “best interests” standard of care for customers. The notice also said the new suitability rule would apply to “potential” customers and to “investment-related” products that were not securities.
Jamieson writes that the best-interests standard in particular caught some off guard, since the Securities and Exchange Commission is working on developing a fiduciary standard under the Dodd-Frank Act. Many people think that Finra is trying to get a jump on overseeing a fiduciary duty in an attempt to bolster its case for getting oversight of advisers.
Finra’s May notice also resurrected a controversial effort to get broker-dealers to more closely supervise non-securities activities in which their representatives may be involved, such as mortgages or insurance. “Suitability obligations apply … to a broker’s recommendation of an investment strategy to use home equity to purchase securities or to liquidate securities to purchase an investment-related product that is not a security,” the notice said.
In 2009, Finra asked for comment about expanding suitability obligations to any product or service made in connection with a firm’s business, whether or not it was a security. But it backtracked on that idea after encountering industry opposition. The impending changes have caused broker-dealers to scramble to figure out how to oversee various strategies and document the supervisory process.
Jamieson concludes that the most challenging issue is defining and tracking what strategies a representative is recommending, observers said, including recommendations to hold an investment that are not recorded in any trade records. Despite the uncertainty over the new rule, many feel that it’s unlikely that Finra will take any immediate enforcement action against firms that have made an effort to comply.
Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented numerous clients nationwide. If you or a family member have investment losses, call for a free consultation on how to potentially recover those losses. To speak with an attorney call 888-760-6552, or visit our website at: http://www.securitieslawyer.com.
Soreide Law Group, PLLC., representing investors nationwide.
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