Securities licensed? Watch out for FINRA suitability enforcement.
SUITABILITY ENFORCEMENT ROARED BACK IN 2015, according to Washington, D.C., law firm Sutherland Asbill & Brennan LLR According to its annual survey of FINRA enforcement actions, the organization reported 76 suitability cases in 2015, resulting in $18.3 million in fines.
In addition to significant fines, FINRA also imposed $28 million in restitution, a 1,117 percent increase from $2.3 million in 2014. Given the apparent increase in FINRA scrutiny of suitability issues, the National Ethics Association and its E&O insurance affiliate, EOforLess, recommend all securities-licensed advisors redouble their efforts to recommend only securities that are consistent with customer needs and risk profiles.
NEA and EO for Less also suggest reviewing the basics of suitability in order to prevent unforced errors. To this end, it's important for advisors to know that FINRA has mandated three types of suitability requirements: reasonable basis, customer specific and quantitative.
[Reasonable-basis suitability] means brokers must first understand the products they sell before recommending them to clients. What's more, not understanding a product can still create compliance problems even if the recommendation in and of itself is suitable.
Customer-specific suitability means a broker must make only recommendations that are consistent with the customer's "investment profile." To determine that profile, the broker must conduct a comprehensive fact-finder.
Quantitative suitability According to the Robins Kaplan law firm, brokers must use reasonable diligence to secure this information (i.e., they must ask for it). But further efforts may be required if the person supplies inaccurate answers or shows diminished capacity.
Means the broker must have a reasonable basis to believe the number of securities transactions they make for a client is not excessive given the person's profile. Under this suitability type, a securities purchase might be suitable in and of itself, but not suitable if repeated 10, 50 or 100 times.
Finally, FINRA Rule 2111 requires brokers to always act in the best interests of a client, recommending "client-first" solutions rather than those that boost their own commissions or help their firms serve other agendas.
For more information, the National Ethics Association and EOforLess recommend that advisors review their broker-dealer suitability guidelines.
RED FLAG REMINDER
BY NATIONAL ETHICS ASSOCIATION