Disclosure & Agent Responsibilities
†FINRA Suitability and Disclosure Rules
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator of securities firms doing business in the United States. Created in 2007 through the consolidation of NASDís and NYSEís Member Regulation and Arbitration functions, FINRA protects investors and securities market integrity.† It does so by registering and educating all industry participants; auditing securities firms; writing and enforcing industry rules and federal securities laws; informing and educating the investing public; providing trade reports; and resolving disputes between investors and registered firms.
General Standards of Suitability:† Rule 2310
FINRA imposes a general requirement on its member firms and their registered representatives that recommendations be "suitable" for each client.† The general duty of registered representatives can be found in Rule 2310 "Recommendations to Customers (Suitability):
(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.
(b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:
(1) the customer's financial status;
(2) the customer's tax status;
(3) the customer's investment objectives; and
(4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.
(c) For purposes of this Rule, the term "non-institutional customer" shall mean a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).
Variable Annuity Suitability: Rule 2821
FINRA developed Rule 2821 to enhance broker-dealers' compliance and supervisory systems and provide more comprehensive and targeted protection to investors who buy or exchange deferred variable annuities. Deferred variable annuities are complex investments containing both securities and insurance features, which can be confusing for both the agents who sell them and customers who buy them.† Rule 2821 was designed to guide agents in formulating suitable recommendations for their clients -- and help member firms supervise their representative's annuity business.† Rule 2821 has four main points:
® make a reasonable effort to obtain and consider various types of customer-specific information, including age, income, financial situation and needs, investment experience and objectives, intended use of the deferred variable annuity, investment time horizon, existing assets, liquidity needs, liquid net worth, risk tolerance and tax status.
® have a reasonable basis to believe the customer has been informed of the material features of a deferred variable annuity, such as a surrender charge, potential tax penalty, various fees and costs, and market risk.† (Delivery of disclosure documents is not, by itself, an adequate effort to "inform" or educate the customer of the important features.)
® have a reasonable basis to believe that the customer would benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization or death or living benefits. (The customer need not benefit from all of the features, just that the contract's features could be of benefit to the client.)
® make a customer suitability determination as to the investment in the deferred variable annuity, the investments in the underlying sub-accounts at the time of purchase or exchange, and all riders and other product enhancements and features contained in the annuity contract.
® have a reasonable basis to believe that a deferred annuity exchange transaction is suitable for the particular customer, considering, among other factors, whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, be subject to increased fees or charges, and has had another exchange within the preceding 36 months.
Principal Review and Approval Obligations for All Transactions
Please note:† Rule 2821 went into effect in May 2008.† Broker-dealers were concerned that the 7-day review period would be insufficient for proper analysis and review of annuity transactions.† FINRA is currently not enforcing of the 7-day requirement.† FINRA is completing a review of paragraph (c) of the rule and will probably propose changes to the timeframe.† The SEC must then approve those changes. In the meantime, the rest of Rule 2821 is effective.†
Firm Supervisory Procedures
Firm Training Program