Bakhtiari & Harrison is an “AV” rated law firm, focused on the worldwide representation of clients in complex arbitration, litigation, and related legal services in matters involving the securities industry. The firm’s partners have extensive experience in securities, employment, and regulatory matters. Our focus is on delivering strategic and creative client-centric solutions.
We represent individuals and institutions in securities arbitration and litigation claims before FINRA (Financial Industry Regulatory Authority), AAA (American Arbitration Association), other arbitration providers, and in state and federal courts. The firm represents financial services professionals, registered investment advisors, and broker-dealers in employment matters, industry disputes, and regulatory investigations.
Understanding FINRA Rule 2111
FINRA Rule 2111 is a crucial regulation that mandates brokers and financial advisors to recommend transactions or investment strategies that are suitable for their clients. This suitability is based on a comprehensive understanding of the clients’ investment profiles. The rule is designed to protect investors by ensuring that financial recommendations are made with their best interests in mind.
Key Components of FINRA Rule 2111
Reasonable-Basis Suitability: This requires financial advisors to have a reasonable basis to believe that their recommendations are suitable for at least some investors. This determination is based on thorough diligence, which involves understanding the potential risks and rewards associated with the security or strategy being recommended.
Customer-Specific Suitability: Recommendations must be tailored to the specific customer’s investment profile. This includes factors such as age, other investments, financial situation, tax status, investment objectives, experience, and risk tolerance. The aim is to ensure that the advice given is appropriate for the individual client’s needs and circumstances.
Quantitative Suitability: This aspect ensures that a series of recommended transactions are not excessive when viewed in the context of the customer’s investment profile. Factors such as the turnover rate, cost-equity ratio, and the use of in-and-out trading in a customer’s account are considered to determine if the activity is excessive and unsuitable for the client.
Supplementary Material and Interpretative Guidance
The supplementary material to Rule 2111 provides additional guidance on its application. This material emphasizes the importance of fair dealing and ethical standards in financial transactions. Key points include:
General Principles: All member and associated person relationships with customers are underpinned by the fundamental responsibility for fair dealing. Sales efforts must be conducted within the ethical standards of FINRA rules, with a focus on fair dealing with the public. The suitability rule is designed to promote ethical sales practices and high standards of professional conduct.
Disclaimers: Financial advisors cannot disclaim any responsibilities under the suitability rule. This ensures accountability and prevents advisors from evading their duties.
Recommended Strategies: The rule interprets the phrase “investment strategy involving a security or securities” broadly. It includes explicit recommendations to hold securities. However, general financial and investment information that does not include specific recommendations is excluded from the rule’s coverage.
Customer’s Investment Profile: A recommendation can only be made if the advisor has sufficient information about the customer to believe it is suitable. This requires reasonable diligence to obtain and analyze the customer’s investment profile.
Components of Suitability Obligations: The rule’s obligations are divided into reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Each of these components requires a thorough understanding of the customer’s needs and the securities or strategies being recommended.
Customer’s Financial Ability: Advisors must have a reasonable basis to believe that the customer has the financial ability to meet the commitment of the recommended transaction or strategy.
Institutional Investor Exemption: There is an exemption for institutional investors if they are capable of evaluating investment risks independently and affirmatively indicate they are exercising independent judgment.
Regulation Best Interest: The rule does not apply to recommendations subject to SEA Rule 15l-1 (Regulation Best Interest), which governs broker-dealer standards of conduct.
Insights from the FINRA Suitability FAQ
The FINRA Suitability FAQ provides additional clarity on the application of Rule 2111. Some key insights include:
Implicit Recommendations: Brokers who make transactions without informing customers have implicitly recommended those transactions, triggering suitability obligations. However, implicit recommendations to hold a security require explicit advice to be considered under the rule.
Hold Recommendations: For a “hold” recommendation to trigger the suitability rule, it must be explicit. General inquiries about maintaining investments at a firm do not constitute hold recommendations.
Institutional Exemptions: The suitability rule provides exemptions for institutional customers if they can evaluate investment risks independently and affirmatively indicate they are exercising independent judgment.
Customer Definition: The rule defines a “customer” as anyone who opens a brokerage account or purchases a security, excluding brokers or dealers. The suitability rule applies to recommendations made to potential investors who then become customers.
Documentation Requirements: While firms do not need to update all customer-account documentation by the rule’s implementation date, they must seek to obtain and consider relevant customer-specific information when making recommendations. The rule allows for a risk-based approach to documenting suitability determinations.
Our Expertise in FINRA Rule 2111
We understand that FINRA Rule 2111 is essential for maintaining the integrity and ethical standards of financial transactions. This rule requires:
- Reasonable-Basis Suitability: Advisors must have a reasonable basis to believe their recommendations are suitable for at least some investors based on reasonable diligence.
- Customer-Specific Suitability: Recommendations must be suitable for specific customers based on their unique profiles.
- Quantitative Suitability: A series of recommended transactions should not be excessive considering the customer’s investment profile.
Contact Us
For more information and to ensure your investments and advisory practices are in full compliance with FINRA Rule 2111, contact Bakhtiari & Harrison today. Visit our website at www.bhseclaw.com to learn more about our services and to schedule a consultation. We are dedicated to providing exceptional legal support and guidance to protect your financial interests.
Areas We Serve
Bakhtiari & Harrison proudly offer our services to all cities and suburbs in Los Angeles County. Our reach extends to:
Los Angeles, Long Beach, Glendale, Santa Clarita, Lancaster, Palmdale, Pomona, Torrance, Pasadena, El Monte, Downey, Inglewood, West Covina, Norwalk, Burbank, Compton, South Gate, Carson, Santa Monica, Whittier, Hawthorne, Alhambra, Lakewood, Bellflower, Baldwin Park, Lynwood, Redondo Beach, Buena Park, Arcadia, Diamond Bar, Monterey Park, Gardena, Paramount, Rosemead, Pico Rivera, Montebello, Huntington Park, South Whittier, San Gabriel, Bell Gardens, Culver City, Glendora, Temple City, Covina, Azusa, San Dimas, La Mirada, Cerritos, Manhattan Beach, El Segundo, and Hermosa Beach.