Finra: brokers must update client info even if they keep their VA
June 25, 2012 by Darla Mercado
Broadened general suitability rule to apply July 9
By Darla Mercado
June 25, 2012
Advisers who recommend that a customer stick with a variable annuity will need to revisit the information in the client’s profile and make sure the product is still suitable.
That’s the requirement in the Financial Industry Regulatory Authority Inc.’s Rule 2111, a regulation that covers general suitability for recommended transactions and investment strategies involving securities.
The regulation, which will be implemented July 9, will require that brokers perform reasonable due diligence to understand the nature of the recommended strategy or securities product and whether it’s suitable. Brokers also must determine suitability on consumer-specific and quantitative levels.
At the Insured Retirement Institute’s Government, Legal and Regulatory Conference in Washington on Monday, a Finra official noted that Rule 2111 also will apply to “hold” strategies — situations in which brokers advise a client to stick with a security or an investment strategy.
“The recommendation [to hold] has to be explicit,” said Lawrence Kosciulek, director of investment company regulation at Finra, and a panelist at IRI’s conference. “These are going to be hard calls, and this applies at the [variable annuity] contract level and the subaccount level.”
In practice, this means brokers will have to update clients’ information to ensure that the decision to stay in a variable annuity is still appropriate. Hypothetically, if a client has held on to a variable annuity for 10 years, a recommendation that he or she stick with it will require the broker to go over the customer’s information and make sure his or her risk profile allows for it and that it still makes economic sense.
Panelist Thomas Horack, chief compliance officer at John Hancock Financial Network, said that his firm has created a “hold” check-off on tickets to ensure that if the adviser believes he or she made an explicit recommendation to hold a variable annuity, the ticket goes into the client’s file.
Recommendations that a client decide to begin taking withdrawals from an annuity also require a review of the client’s information under 2111, Mr. Kosciulek noted. In a situation where a client holds on to a variable annuity for 10 years and then goes to the broker to ask about taking income, this conversation is considered an investment strategy recommended by the broker, he added.
“Ten years later, who knows what happened with that individual?” Mr. Kosciulek said. “You might need more-up-to-date information.”