As industry officials digest the Financial Industry Regulatory Authority’s (FINRA) new suitability rule, Rule 2111, which took effect July 9, more onerous due diligence requirements for BDs are surfacing as well as reps having to take on what looks to be fiduciary responsibility.
Ron Rhoades (left), the 2012-2013 chairman of the National Association of Personal Financial Advisors (NAPFA) and associate professor of Alfred State College’s Financial Planning Program, points to the rule’s “investment strategy” language as providing the most challenge.
Rhoades says that under the rule, reps and BDs are now required to make sure their “investment strategy” meets suitability requirements.
“The ‘investment strategy’ language used by FINRA has already been interpreted by FINRA to apply to ‘hold’ recommendations,” Rhoades told AdvisorOne. “This will require registered representatives to document, in their client relationship management software, ‘hold’ recommendations to a client, such as: ‘Don’t do anything now.’ And, of course, some supervision of such recommendations must occur.”
Primarily, he continues, “this presents a documentation requirement for BDs and reps.” Plus, “liability for hold recommendations may result, especially in situations when due diligence on a product has not been updated.”
But a “larger issue,” he says, “is whether FINRA construes ‘investment strategy’ more broadly, as they have stated they will.”
For instance, if investment strategy is construed to apply to “portfolio investment policy” (i.e., overall portfolio investment strategies), then this may require BDs to perform two tasks, he says.