Introduction Law is a critical piece of business and society. It puts boundaries on behavior and allows the public to operate in a safe and healthy manner. Law allows our government to regulate criminal and civil proceedings and dictates what we distinguish as right and wrong. The United States Constitution endorses a society that runs efficiently. In order for our society and businesses to be efficient, the law must be understood and implemented. Functions and Role of Law in Business and Society.
Law is critical to business because it protects organizations and their clients and is critical to society because it puts boundaries on behavior and allows the public to operate in a safe and healthy manner. The United States Constitution and Bill of Rights have given us a foundation for these rules in which the law breaks down into many different parts. The functions of Law are substantive law, criminal law, civil law, common law, and statutory law.
Each of these is used to implement the ground rules set forth by our founding fathers. Personal Example of Law For the last six years, I have been privileged to work for one of the largest Financial Firms in the world. In 2008, we acquired a Wealth Management sector from one of the largest banks which led us to one of the most prevalent mergers in financial history. Coincidentally, while going through what we called the Joint Venture, or “JV” the Financial Industry Regulatory Authority, Inc., or FINRA, announced a new standard called “Know Your Client” (KYC).
Therefore, along with enhancing the protection of our clients within our software and applications, we were also adding additional requirements to our interactions with clients. In the financial industry, there is heightened awareness of the legal issues that can, and do, occur. In many instances, the law not only protects our organization, but also our advisors and clients as well.
In an effort to ensure our client receive customized advice and suitable recommendations, we have adopted the new KYC expectations for our account opening process and also reached out toexisting clients to update this information in our system. As part of this new FINRA regulation, we are required to follow the standards set forth in regulatory notice 09-25 which states: “Proposed FINRA Rule 2111 contains a number of minor changes regarding the gathering and use of information as part of the suitability analysis.
For instance, the information that must be analyzed in determining whether a recommendation is suitable would include not only information disclosed by the customer in response to the member firm’s or associated person’s reasonable efforts to obtain it, but also information about the customer that is “known by the member or associated person. ” The proposal also requires members or associated persons to make reasonable efforts to obtain more information than is explicitly required by NASD Rule 2310 (e. g., age, investment experience, investment time horizon, liquidity needs and risk tolerance).
” As part of our due diligence with clients, the information that must be collected includes numerous suitability questions. Some of the questions sound pretty basic, but without having them on file, they Advisor cannot place trades or give advice. For example, the client’s age, other investments, financial situation and needs, tax status, investments objectives, investment experience, investment time horizon, liquidity need, and risk tolerance are all items that we must have on file.
The answers are used to determine the client’s investment strategy and to protect the client and our Firm from advice that may not be suitable and may pose risk to the client and/or Firm. Since money laundering continues to be an issue for businesses, the KYC regulations help to protect the company from this as well. Even with these new precautions in place, we still run into situations where the client feels they have incurred a financial loss or unsuitable advice. Being that they typically do not complain until after a proven loss has occurred in their account, it is not difficult for us to dispute this in legal proceedings.
Most of the time, these disputes are handled through an alternative dispute resolution (ADR). The key in all transactions is making sure that the client fully understands the matter and that they verbally agree to what is taking place. Having the client on a recorded phone line when speaking with them or documenting precisely what happened in the account notes is crucial if and when a legal issue arises. Now that we have extensive information about suitability and have a detailed method for documenting client interactions, we can be.