In November 2010 the Securities and Exchange Commission (SEC) approved two new consolidated FINRA rules governing know-your-customer (Rule 2090) and suitability (Rule 2111) obligations of broker-dealers. These rules were to take effect on October 7, 2011 but were extended until July 9, 2012.
What this means for a broker-dealer and its advisers is that they must “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 2090).
Also the broker-dealer and its advisers 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 information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile” (Rule 2111).
As I read these “new rules” I thought it was obvious that every business should understand and know their customers; didn’t know it had to be written into a Rule.
While I can certainly understand why some of my broker-dealer clients will be concerned that government regulations are becoming an expensive proposition, I can see how these rules may help to increase public confidence in the industry.
Unfortunately, I have firsthand experience that these new rules may be welcome to the public. About a year ago, my brother met with an adviser to explain his financial situation and desire to purchase a house. He wanted a safe investment that was liquid enough to be able to sell quickly when that dream house was located. My brother is not a sophisticated investor, nor does he understand there is no “sure thing,” and if it looks too good to be true it probably isn’t legal. He is also too trusting. When the adviser told him he could invest his money in a guaranteed principle yielding 6% return, he jumped at the opportunity. Turns out, the adviser put him into a retirement annuity which has a 5% withdrawal penalty. Needless to say, he is fighting with the adviser to get his money returned.
Click here for the new rulings.