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How FINRA’s Rules And The SEC’s Regulation Best Interest Can Rectify Investment Losses In Your Retirement Accounts

Overview

Are you a senior investor or retiree with inexplicable losses in your retirement account? If so, you may have more legal protections than you realize, including protections under the Financial Industry Regulatory Authority’s (“FINRA”) rules and the Securities and Exchange Commission’s (“SEC”) Regulation Best Interest (“Reg BI”). 

FINRA’s Protections

FINRA has several key rules that protect investors if they have inappropriately suffered losses in their investment account. First, under FINRA Rule 2111 (Suitability), “A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.” In addition, under FINRA Rule 2010 (Standards Of Commercial Honor And Principles of Trade), “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” Moreover, under FINRA Rule 4512 (Customer Account Information), member firms must diligently update and maintain accurate customer profile information. 

The SEC’s Reg BI

The SEC’s Reg BI, which took effect in June 2020, fundamentally raised the standard of conduct for broker-dealers when making investment recommendations to retail customers. Before Reg BI, brokers were generally required only to recommend investments that were “suitable” — a relatively low bar. Reg BI changed that. Under Reg BI, “[a] broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.” This means they must meet all of the following obligations:

  • Disclosure Obligation. A broker-dealer must disclose all material facts relating to the scope and terms of the relationship with the retail customer, and to conflicts of interest associated with the recommendation.
  • Care Obligation. A broker-dealer must: (A) Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (B) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; and (C) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile and does not place the financial or other interest of the broker, dealer, or such natural person making the series of recommendations ahead of the interest of the retail customer.
  • Conflict of Interest Obligation. A broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to: (A) Identify and at a minimum disclose, in accordance with paragraph (a)(2)(i) of this section, or eliminate, all conflicts of interest associated with such recommendations; (B) Identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for a natural person who is an associated person of a broker or dealer to place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; (C)(1) Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations, in accordance with subparagraph (a)(2)(i), and (C)(2) Prevent such limitations and associated conflicts of interest from causing the broker, dealer, or a natural person who is an associated person of the broker or dealer to make recommendations that place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; and (D) Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.
  • Compliance Obligation. A broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.

Portfolio Allocation

For senior investors in or approaching retirement, these protections matter tremendously. While your financial advisor likely should have structured your portfolio with a conservative and diversified strategy, designed to weather market swings, some advisors focused on their own commissions and sold unsuitable investment products to clients that were not in their clients’ best interest. Brokers who recommended unnecessarily high-risk products such as Complex Products, Registered Index-Linked Annuities, Structured Products, and GWG Holdings, Inc. corporate bonds (“L-Bonds”) to clients did not fully disclose and explain the risks associated with these investments. If your portfolio contains high-risk investments rather than a balanced strategy designed to protect your retirement savings, you may be a victim. 

Impacted Investors

At Belfort Law, PLLC, we understand how devastating an unexpected loss in the value of your portfolio can be. Whether you planned to preserve your wealth to pass it on to future generations or use it to generate income in retirement, a financial hit at this juncture, without recourse, can forever impact your legacy, lifestyle, and comfort. If you have suffered investment losses in your retirement account, do not hesitate to contact our office at 800-556-3526 or complete our contact form for a free consultation. We work on a contingency fee basis to try to recover losses. In other words, if we do not obtain a recovery, you do not owe us any legal fees. Act before time runs out on your claim.

How FINRA’s Rules And The SEC’s Regulation Best Interest Can Rectify Investment Losses In Your Retirement Accounts

Overview

Are you a senior investor or retiree with inexplicable losses in your retirement account? If so, you may have more legal protections than you realize, including protections under the Financial Industry Regulatory Authority’s (“FINRA”) rules and the Securities and Exchange Commission’s (“SEC”) Regulation Best Interest (“Reg BI”). 

FINRA’s Protections

FINRA has several key rules that protect investors if they have inappropriately suffered losses in their investment account. First, under FINRA Rule 2111 (Suitability), “A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.” In addition, under FINRA Rule 2010 (Standards Of Commercial Honor And Principles of Trade), “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” Moreover, under FINRA Rule 4512 (Customer Account Information), member firms must diligently update and maintain accurate customer profile information. 

The SEC’s Reg BI

The SEC’s Reg BI, which took effect in June 2020, fundamentally raised the standard of conduct for broker-dealers when making investment recommendations to retail customers. Before Reg BI, brokers were generally required only to recommend investments that were “suitable” — a relatively low bar. Reg BI changed that. Under Reg BI, “[a] broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.” This means they must meet all of the following obligations:

  • Disclosure Obligation. A broker-dealer must disclose all material facts relating to the scope and terms of the relationship with the retail customer, and to conflicts of interest associated with the recommendation.
  • Care Obligation. A broker-dealer must: (A) Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (B) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; and (C) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile and does not place the financial or other interest of the broker, dealer, or such natural person making the series of recommendations ahead of the interest of the retail customer.
  • Conflict of Interest Obligation. A broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to: (A) Identify and at a minimum disclose, in accordance with paragraph (a)(2)(i) of this section, or eliminate, all conflicts of interest associated with such recommendations; (B) Identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for a natural person who is an associated person of a broker or dealer to place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; (C)(1) Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations, in accordance with subparagraph (a)(2)(i), and (C)(2) Prevent such limitations and associated conflicts of interest from causing the broker, dealer, or a natural person who is an associated person of the broker or dealer to make recommendations that place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; and (D) Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.
  • Compliance Obligation. A broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.

Portfolio Allocation

For senior investors in or approaching retirement, these protections matter tremendously. While your financial advisor likely should have structured your portfolio with a conservative and diversified strategy, designed to weather market swings, some advisors focused on their own commissions and sold unsuitable investment products to clients that were not in their clients’ best interest. Brokers who recommended unnecessarily high-risk products such as Complex Products, Registered Index-Linked Annuities, Structured Products, and GWG Holdings, Inc. corporate bonds (“L-Bonds”) to clients did not fully disclose and explain the risks associated with these investments. If your portfolio contains high-risk investments rather than a balanced strategy designed to protect your retirement savings, you may be a victim. 

Impacted Investors

At Belfort Law, PLLC, we understand how devastating an unexpected loss in the value of your portfolio can be. Whether you planned to preserve your wealth to pass it on to future generations or use it to generate income in retirement, a financial hit at this juncture, without recourse, can forever impact your legacy, lifestyle, and comfort. If you have suffered investment losses in your retirement account, do not hesitate to contact our office at 800-556-3526 or complete our contact form for a free consultation. We work on a contingency fee basis to try to recover losses. In other words, if we do not obtain a recovery, you do not owe us any legal fees. Act before time runs out on your claim.

Start Your Free Consultation
 (800) 556.3526
Return home