Background<\/b>
\nMany people know about Jordan Belfort, the Wolf of Wall Street. Possibly from seeing the movie of that name. He made his fortune by aggressively marketing penny stocks, many of them fraudulently, to retail customers.<\/p>\n
Many are also aware of the SEC\u2019s recently adopted Regulation Best Interest. That rule requires a brokerage firm or its personnel making a recommendation to a retail customer to act in the best interest of the customer as well as mitigate or disclose various conflicts of interest.<\/p>\n
Could Belfort have survived, and even prosper, under Regulation Best Interest? Possibly \u201cYes.\u201d<\/p>\n
The Flaw<\/b>
\nRegulation Best Interest applies to \u201crecommendations\u201d but does not define that term. The SEC says recommendation means what it means under the rules of the self-regulatory organizations. The applicable rule is FINRA Rule 2111 (Suitability). But that rule does not define what a recommendation is.<\/p>\n
Instead, FINRA has issued a number of Regulatory Notices setting forth the tests it would apply in determining whether a communication or series of communications constitutes a recommendation. They are all facts and circumstances driven, i.e. there is no definitive answer. These are:
\na)\tGiven the content, context and manner of presentation, could the communication be viewed as a call to action; would it reasonably influence an investor to trade a specific security or group of securities ;
\nb)\tThe more individually tailored the communication is to a particular customer or targeted group of customers about a specific security or group of securities, the more likely it is a recommendation; and
\nc)\tWhile an individual communication may not be a recommendation, a series of communications may be a recommendation when considered in the aggregate.<\/p>\n
The Test<\/b>
\nWould the following conversation be a recommendation?<\/p>\n
Belfort: Hello. My name is Jordan Belfort. I am with Dowe Cheatem and How, a broker-dealer registered with the SEC. Our business is acting as a market-maker or dealer, buying and selling low priced speculative stocks. We trade for our account in these stocks because you can make more money with a low priced stock than with a high priced blue chip. We trade stocks based on price movements- i.e. the likelihood they will go up or down and not based on the merits, value or worth of the company. We make no recommendations.<\/P><\/p>\n
Your name was given to me as an astute investor. So i wanted to tell you about \u201cFlying Widget\u201d, a stock we are actively trading. Some of our customers have bought and sold this stock at a great profit. Others have bought and are holding in light of the rapid price rise. We just bought a block of \u201cFlying Widget\u201d from a customer who bought it a few weeks ago at $3.00 and sold it to us at $5.00.<\/p>\n
How many shares can I put you down for?<\/P\n\n\n\n
Customer: Can you tell me something about this company, its trading history, etc.<\/P><\/p>\n
Jordan: No. As I said we don\u2019t follow the company; we trade based on price movement of the stock, and we make no recommendations. So how many shares would you like?<\/p>\n
Question<\/b>
\nIs this conversation a \u201crecommendation\u201d under the FINRA standards? Is it a recommendation as defined in the dictionary? How would a judge rule?<\/p>\n
Contact<\/b>
\nPlease feel free to call or email me (Office 212 455 0476; Cell 914 646 8035; email msimkin@securitiesregslawyer.com) with any comments or questions.<\/P><\/p>\n
September 2019 <\/P><\/p>\n","protected":false},"excerpt":{"rendered":"
Background Many people know about Jordan Belfort, the Wolf of Wall Street. Possibly from seeing the movie of that name. He made his fortune by aggressively marketing penny stocks, many of them fraudulently, to retail customers. Many are also aware of the SEC\u2019s recently adopted Regulation Best Interest. That rule requires a brokerage firm or … Continue reading The Wolf of Wall Street Meets Regulation Best Interest: Who Wins?<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-176","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts\/176","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/comments?post=176"}],"version-history":[{"count":2,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts\/176\/revisions"}],"predecessor-version":[{"id":178,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts\/176\/revisions\/178"}],"wp:attachment":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/media?parent=176"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/categories?post=176"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/tags?post=176"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}