Important Changes to FINRA
By Kluger, Kaplan, Silverman, Katzen & Levine, P.L. September 24, 2012
By Bruce A. Katzen
On July 9, the Financial Industry Regulatory Authority (FINRA) announced that two new rules have gone into effect – Rule 2090 – the so-called “Know Your Customer” rule and Rule 2111, the “suitability” rule. Rule 2090 heightens the requirement for financial advisors to know the “essential facts” concerning every customer. Prior to the enactment of Rule 2090, financial advisors generally relied upon SEC Rule 17a-3, which requires brokers to update client information every 36 months. Rule 2111, the “Suitability Rule” requires brokers to evaluate investments in light of a customer’s particular needs, taking into account a customer’s age, investment experience, time horizon, liquidity needs and risk tolerance.
I represent investors in cases where the advisor fails to take these factors into account so I am particularly pleased by FINRA‘s move towards accountability for investment professionals. As a result of these changes to FINRA, financial institutions, which often have numerous asset management groups in office all over the country, need to implement global changes to their client management policies to account for the new requirements. The new policies should incorporate all groups in all states in order to prevent inconsistencies with compliance within the financial institution.
The changes to FINRA finally codify the obligations that previously existed for brokers pursuant to court opinions and arbitrator’s rulings, but because there was no firm rule in place, the firms did a poor job of regulating their brokers to enforce the requirements. Now documentation is mandatory. These changes are an important step towards imposing accountability on investment firms. As these changes to FINRA take root, I will be closely monitoring how financial institutions and individual investment managers respond to the changes and will continue to discuss them on this blog.