FINRA’s New Suitability Rule in Effect

Bettina EckerleBrokers should be aware that FINRA’s new suitability rule took effect on July 9.

The new suitability rule imposes broader obligations to oversee customer accounts and investment strategies.  It follows guidance that FINRA issued in late May and requires brokers to perform reasonable diligence on products, understand the products and have a reasonable basis to think that a product or investment strategy is suitable, based on a number of factors that now also include an investor’s age, investment experience, time horizon, liquidity needs and risk tolerance. Specifically, there are three main categories:

  • Reasonable-basis suitability: A broker must perform reasonable diligence to understand the nature of a recommended security and  the potential risks and rewards associated with it;
  • Customer-specific suitability: A security must be  suitable for the particular customer based on the customer’s investment profile; and
  • Quantitative suitability: Recommended securities transactions must not be excessive.

Now interestingly enough, in its May guidance (Regulatory Notice 12-25), FINRA laid out a “best interests” standard of care for customers. This sounds to the author as if we are getting awfully close to the definition of a “fiduciary”.

Let’s see how the ongoing discussion of a unified standard for advisers and brokers unfolds.

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