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September 27, 2012 at 11:31 AM
The business card says he’s a registered financial consultant (RFC) and accredited investment fiduciary (AIF), but lately David Schlossberg, senior partner at Assured Concepts Group, Ltd., in East Dundee, Ill., has had to hone his detective and writing skills, too. Why? Because Schlossberg, like thousands of his peers, must comply with new suitability requirements such as FINRA’s Rule 2111 that apply to advisors and agents who recommend and/or sell securities such as variable annuities.
“With products like variable annuities, there’s a lot more writing to justify a recommendation [to a client],” explains Schlossberg, “and a lot more information to track down—stuff like average expenses of underlying mutual funds, which can be really tough and tedious to find. Thank goodness for the Internet.”
Approved by the Securities and Exchange Commission in November 2010 and implemented by FINRA July 9, Rule 2111 is the latest in a series of federal and state regulations, policies and guidelines designed to protect the public from making unsuitable investments in a range of securities. The increasing complexity of those instruments, along with a growing emphasis on self-funded retirement and the investing public’s increasing sense of nest-egg vulnerability, is prompting regulators to more closely scrutinize the due diligence efforts and recommendations of advisors, broker-dealers and registered reps who deal in such products as variable annuities, exchange-traded funds (ETFs), structured notes, swaps, hedge funds and certain derivative-based strategies.
“There is a lot going on [in the area of suitability regulation],” observes Patricia Kelley, chief compliance officer for Prudential Annuities in Shelton, Conn. “It’s an exciting time to be in the compliance world.”
But as Kelley acknowledges, taking on additional information gathering and documentation responsibilities for investment recommendations and interaction with clients isn’t every advisor’s idea of excitement. Modeled after NASD Rule 2310, FINRA Rule 2111 (Suitability) requires firms and advisors to more thoroughly justify their securities recommendations (even recommendations to “stay the course,” notes Kelley) through greater information gathering and documentation. A companion “Know Your Customer” policy, FINRA Rule 2090, also took hold in July 2012. Modeled after former NYSE Rule 405(1), it requires firms to use “reasonable diligence” in gathering “essential facts” about their clients in order to make suitable investment recommendations.
Then there’s FINRA Rule 2330, which beginning in February 2010 imposed new sales practice standards for recommended purchases and exchanges of deferred variable annuities. Meanwhile, oversight of annuity transactions also has heightened at the state level, largely as a result of the National Association of Insurance Commissioners’ adoption in 2010 of the Annuity Transactions Model Regulation (Model 275), which outlines standards and procedures for suitable annuity recommendations, requiring insurers to establish a system to supervise recommendations and producers to be trained on the annuity products they sell. To date, according to Kelley, close to 25 states have adopted some version of the NAIC model, with more likely to do so in the months ahead.
It adds up to a formidable—and growing—compliance burden for firms and advisors who deal in securities. How to best handle the increased workload and stay within the rules? Try these 10 suggestions from the compliance experts:
1. Get to know your clients better. “Communication is key,” says Laura Crosby-Brown, MBA, EA, director of compliance at Regulatory Compliance, LLC, in Londonderry, N.H. “It’s about really knowing and talking with clients, not just through text messages but through frequent conversations, either face-to-face or on the phone.” From fuller client-advisor relationships, suitable recommendations will likely flow.
2. Document fastidiously. “Documentation is probably the most important factor” in playing within the new suitability rules, according to Brad Burgtorf, CPA, principal consultant for ACA Compliance Group in Denver and a former SEC examiner.
It’s vital to create a paper trail—“to get into the habit of making sure they document everything around a recommendation, even if it’s a discussion that could lead to a recommendation,” asserts Crosby-Brown. “I’ve heard people say they’re reluctant to put things in writing because it’s discoverable [in a legal proceeding]. That’s precisely why you should put things in writing.”
Advisors have various resources to rely on to support their documentation efforts, notes Burgtorf, from document management software that “tells you exactly who touched what and when,” and portfolio review software, to CRM, attestation, and full-blown compliance support systems.
