How much information do reps need to get for new accounts?
Q: I’ve been having a “debate” with my compliance department. They tell me I need to get all the information requested on the new account forms from clients. I don’t see why I need to get a client’s household income, liquid net worth and total net worth. It just seems like overkill and some clients balk at giving me some of this info (particularly their total net worth). Can you tell me what’s required by the rules?
A: The short answer is that you need to obtain the information that your compliance department tells you to obtain.
However, to address your specific question, FINRA Rule 2111, the Suitability Rule, requires that a registered rep obtain sufficient information about the customer to form a reasonable belief that the recommendation is suitable for that customer.
The Rule spells out certain factors that regulatory authorities have determined to be generally relevant to making that determination. Those factors include, but are 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 you.
The problem with answering your question lies in the gray areas in defining exactly what information is needed to determine a customer’s financial situation. Even then, the weight given to the various factors can vary widely depending on all the facts and circumstances.
To complicate things a bit more, recently adopted Regulation Best Interest has required some modification to the general suitability rule. As FINRA pointed out in Regulatory Notice 20-18, Reg BI “employs a best interest, rather than a suitability, standard...”
In other words, just because an investment might be “suitable” for someone, doesn’t necessarily mean it’s in their best interests. That goes for investment strategies as well as specific securities. Although the difference may not seem obvious, it does require a subtle shift in the way you think about recommendations to clients.
In terms of your information gathering, that means that while not all of the information will be relevant all of the time, all of the information will be relevant at least some of the time.
So rather than trying to delineate ahead of time what information you think isn’t necessary, it’s better to obtain more information upfront so you will have it if and when you need it.
Please send your questions for compliance expert Alan Foxman to firstname.lastname@example.org