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New FINRA Regulation Seeks to Increase Investor Protection, Cut Through Broker Excuses

New Suitability Rule Aims to Increase Investor Protection, Cut Through Broker Excuses

A new FINRA regulation seeks to improve investor protections in the realm of variable annuities. Though variable annuities have been around for decades, they tend to be associated with high fees, tax consequences, and other pitfalls that make them unsuitable for many investors. They also are intended to be held for a long period of time (sometimes decades), which means that a client’s situation may change in such a way that the product – though once suitable – becomes unsuitable over the years.

Starting July 9, brokers will be required to be on the lookout for such changes in suitability and to consider their clients’ current investment profiles before recommending that they hold on to any particular securities product.

This new regulation should change the way brokers view suitability requirements.

FINRA Rule 2111 states that the performance of reasonable due diligence to ensure suitability is required for all specific investment recommendations, including “hold” strategies. In practice, the new rule will require an advisor to revisit a client’s investment portfolio before the advisor can explicitly recommend that the client stick with (or “hold”) a particular variable annuity. This means that some clients who have held their annuities for long periods of time will be getting a new “suitability” screening that they may not have gotten otherwise.


This is good news for individual investors who typically hold on to their investment products for a period of several years or more. Prior to the implementation of the revised rule, unscrupulous brokers and advisors tried to argue that they weren’t required to ensure a client’s current holdings were still suitable. Brokerage firms that took over established customer accounts as part of an account transfer often used the same excuse to defend securities arbitration claims. Now, there is even stronger support to counter that excuse.

Categories: SEC News

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