Suitability / Best Interest
Financial professionals must make suitable recommendations that are in the best interest of the investor. This obligation is mandated by the Securities and Exchange Commission (SEC). That is why financial advisors and brokerage firms ask investors about their risk tolerance, investment objective, investment experience, and more.
FINRA Rule 2111 provides that a recommendation for a specific investment or strategy must be rooted in a broker-dealer’s reasonable basis belief that the recommendation is suitable for the investor based on their investment profile. A customer’s investment profile generally includes the investor’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance.
FINRA has recently amended the Suitability Rule in response to the Securities and Exchange Commission’s (SEC’s) adoption of Regulation Best Interest (Reg BI). As of June 30, 2020, Reg BI is officially in effect.
Regulation Best Interest is a new standard of care for financial advisors and broker-dealers. Reg BI incorporates and enhances principles that are found in FINRA’s suitability rule (Rule 2111). When a broker-dealer makes an investment recommendation, or a registered investment adviser provides investment advice, the investor is entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the investor, and that does not place the interest of the financial professional or financial institution ahead of the interests of the retail investors.
The “best interest” standard is not limited to “recommendations” to purchase a security. It also applies to recommendations to sell or hold a security. Additionally, it applies to recommendations to purchase, sell, or hold an investment strategy. Reg BI also explicitly applies to recommendations of types of accounts, including brokerage accounts and investment advisory accounts.
Regulation Best Interest has four core obligations:
- Disclosure: A broker-dealer or financial advisor is required to provide in writing, full and fair disclosure of certain information to investors before or at the time of the recommendation. First, a broker-dealer or financial advisor must provide all material facts that relate to the scope and terms of the relationship between the investor and the firm. This obligation includes disclosing material fees and costs and the scope of services provided to retail customers. Second, a broker-dealer or financial advisor is required to disclose all material facts that relate to any conflicts of interest that exist in connection with the recommendation. For example, if a broker-dealer recommends that you buy a bond that it also underwrote, it must disclose that fact to you at the time of the recommendation.
- Care: A broker-dealer or financial advisor must exercise reasonable diligence, care, and skill in connection with making a recommendation. That is, the advisor must understand the potential, risks, rewards, and cost associated with a particular recommendation, and have a reasonable basis to believe that the recommendation is in the best interest of the investor based on the customer’s investment profile. The investor’s financial interest must be placed ahead of the firm’s and/or financial advisor’s financial interests. For example, if a financial advisor recommends the purchase of a risky investment to a conservative investor, the broker-dealer has not fulfilled their care obligations.
- Conflict of Interest: A broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest.
- Compliance: A broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.
If your financial advisor recommended an investment, investment strategy, or account that was not in your best interest and you have suffered investment losses, contact Iorio Altamirano LLP for a free case evaluation. We are investor advocates, and we are here to keep Wall Street honest.
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