In Regulatory Notice 13-31, FINRA gave guidance regarding its approach and expectations when it conducts a suitability examination. FINRA's critical starting off point begins with its analysis of firm controls through interviews with principals responsible for preparing the firm's policies and procedures.
FINRA is providing this guidance as it has only been a little more than a year since the new "suitability" rule took effect. As part of the overall examination process, FINRA will typically ask the following questions:
- What training has the firm deployed regarding the change in suitability rules?
- Does the firm offer training for associated persons to address investment strategies and hold recommendations?
- How are investment strategies (including hold recommendations) defined and supervised?
- What are the firm's supervisory and compliance procedures for determining whether there was a reasonable basis for the investment recommendation?
- What tools does the firm deploy to uncover in-and-out trading, high turnover rates and commission-equity ratios?
- How does the firm go about determining if a client constitutes an institutional investor for the purposes of being capable to independently evaluate investment risks?
- What protocols does the firm use to ensure that it obtains an affirmative acknowledgement from an institutional client that it is exercising independent judgment?
- If the firm uses a portfolio analytic tool or model, how does it determine whether the tools or models make recommendations subject to the suitability rule or satisfy the safe harbor criteria in Rule 2111.03?
If you have not been subject to a FINRA suitability examination under the new suitability rule, pose these questions to your firm. If you cannot answer them in some fashion, you likely do not have adequate protocols in place. Take the time to revisit your policies and procedures before FINRA does it for you.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.