FINRA recognizes an institutional customer as one that has at least $10,000,000 in assets. The agent’s or member’s suitability determination can be met if the customer:

  • Can independently evaluate the investment risks and merits.
  • Can independently make their own investment decisions.

If the customer meets the above criteria, the member or agent may recommend almost any investment to the customer and allow the customer to determine if it is suitable.

Recommending Exchange Traded  Funds/ ETFs

A representative recommending an exchange traded fund should ensure that the fund’s investment objective meets the customer’s investment objective. If the fund company or broker dealer distributes communication regarding the ETF the following should be disclosed:

  • The fund’s current yield based on dividends only
  • Graph performance of the fund vs. a broad based index
  • The performance of the fund for 10 years or the life of the fund, whichever is less
  • Not imply that a fund is safer than other investments
  • Source of graphs and charts

Exchange Traded Fund Current Yield

When advertising or recommending an ETF, any statement of claim regarding its current yield must be based solely on the annual dividends paid by the fund and may not include any capital gains distributions. .

Example:

ABC fund an ETF is trading at $10 and has paid dividends totaling $1 and has distributed $.75 in capital gains distributions. What is the funds current yield?

Current yield = annual income / current price

CY  =  $1 / $10  = 10%

If the capital gains distributions were included, it would make the current yield look much higher than 10%. If the capital gain distribution of $.75 were included, the current yield would have been quoted at 17.5%.

 



Information Obtained From An Issuer

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