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July 03, 2012 at 07:00 AM
When FINRA Rule 2111 goes into effect July 9, broker-dealers will be on the front lines of complying with new regulations stipulating how suitability reviews are completed on securities purchases (which include variable annuities). More information must be sought from clients and in a new wrinkle, broker-dealers are required to document the suitability of their investment strategy recommendations. Like any new rule, a difficult transition period is expected as advisors switch over to the new compliance measures.
LifeHealthPro.com spoke to Paul Tolley, right, chief compliance officer at Commonwealth Financial Network in
Waltham, Mass., about the run-up to the new FINRA regulation.
Preparations began about a year ago at the independent broker-dealer, said Tolley. New electronic forms were generated to include the additional suitability information broker-dealers must collect from their clients and a series of educational programs were held with the company’s advisors.
Most of the client data FINRA will now mandateage, investment experience, risk tolerance, time horizon and liquidity needswas already included in Commonwealth’s fact-finding forms, Tolley said. The only one missing was liquidity. For that, Commonwealth followed the FINRA template.
Yet despite all those preparations, Tolley said he expects some sales may decelerate as advisors adjust to the new rule and scramble to get the additional data from existing clients. Although the new regulation is not retroactive to already closed securities deals, broker-dealers and their advisors will have to backtrack and get the newly required information from in-place clients if they want future transactions to be approved, Tolley said.
“Firms have legacy accounts that have been on the books for years and if we don’t capture all that additional information it’s certainly going to cause advisors to have to go out en masse to their clients to get updated suitability information so they don’t get new transactions held up,” he said. “That’s likely to delay some executions of transactions because broker-dealers won’t have the information necessary to perform the suitability reviews.”
What constitutes an investment strategy is another potential challenge. FINRA has stated the term should be defined broadly, and has also published several notices more clearly defining what an investment strategy could be. Among those are purchases on the margin and day trading, Tolley revealed. However, there may be other investment strategies not outlined by FINRA that could fall under that requirement.
“It’s deemed to be used generically,” Tolley said. Therefore, Commonwealth has instructed its advisors to document all client interactions and transactions to prove they had done the suitability analysis on whatever strategy they may recommend.
“We have to make certain that if and when a particular transaction is called into question by a regulator, we must have these additional suitability components,” Tolley said.
