September 10, 2010
Florence E. Harmon
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: SR-FINRA-2010-039 Rule Proposal - Rules 2090 and 2111
Dear Ms. Harmon:
I have practiced law for 27 years in Seattle, and have represented brokerage industry clients and securities customers. With some reservations, and suggestions for improvement, I support the Rule Proposals of the Financial Industry Regulatory Authority (FINRA) to adopt FINRA Rule 2111 (Suitability) and FINRA Rule 2090 (Know Your Customer) as part of the Consolidated FINRA Rulebook.
Proposed Rule 2090
I agree that NYSE's "Know Your Customer" rule should be included in proposed Rule 2090. But the proposed rule should clarify that this rule requires the broker to use that knowledge not only for recommendations to buy and sell, but also for recommendations to hold as well. This is especially important when securities are transferred from one firm to another. The broker at the transferee firm should be required to not only know the customer at that point, but also to make recommendations based on the customers individual circumstances and what securities are held in that customers portfolio. If that customer's portfolio does not match his or her investment objectives, risk tolerances, or financial resources, then the broker should be required to recommend changes to the portfolio. Customers already believe that brokers are undertaking these professional tasks as a matter of course, so such a revision would incorporate customer expectations.
The proposed rule also should clarify that the broker should be required not only to know the essential facts about his customer, but also to know the essential facts about the order or recommendation. This would require the broker to not only know your customer but also to know your security. It has long been the law that a broker has a duty to recommend an investment only after studying it sufficiently. Certainly, that is what a brokerage customer expects. There is no reason not to enforce the idea that brokers selling investment products have an adequate understanding of the risks and characteristics of the investments they are selling.
Proposed Rule 2111
Proposed Rule 2111's inclusion of both recommended transactions and investment strategies should be approved. Brokers should have a reasonable basis for recommending an overall strategy, in addition to recommending an individual investment.
However,proposed Rule 2111 must be revised to include a definition of recommended or recommendation. NYSE Rule 472.40(1) appropriately defines a recommendation as any advice, suggestion or other statement, written or oral, that is intended, or can reasonably be expected, to influence a customer to purchase, sell or hold a security. Such an addition would provide a framework for brokers and firms to understand what would constitute a recommendation.
If for no other reason, FINRA and the SEC should include this definition to clarify that recommendations to hold a security are covered by the new rule. In reality, brokers make just as many recommendations to hold a security or not to sell a security, as they would for purchases or sales. In my experience, customers rely on this advice in determining a course of action to take. The inclusion of recommendations to hold within the rule will reflect the realities of the business. There is no justifiable reason to eliminate in the Consolidated Rulebook the requirements of NYSE Rule 472.40(1).
FINRA and the SEC should modify the present proposals so they better reflect the realities of the securities industry and provide needed protection to the investing public.