Securities Law and Compliance Blog
Upcoming Effective Date of FINRA’s Amended Suitability Rule
Back in 2011, FINRA announced its new Suitability Rule. The effective date is approximately fifteen (15) days away on July 9, 2012. Some highlights of the new rule are provided below:
Suitability under amended FINRA Rule 2111:
1) Like its predecessor, the suitability rule is applicable only to those transactions which are “recommended” by the broker-dealer (BD) or registered representative (“RR”);
2) The representative and/or broker-dealer must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence to ascertain the customer’s investment profile;
3) The new rule explicitly applies to investment strategies and hold recommendations involving a security or securities. FINRA defines “strategy” broadly.
4) Expressly, the new rule delineates the following to information to be used in determining suitability: (i) age, (ii) investment experience, (iii) risk tolerance, (iv) liquidity needs, (v) investment time horizon, (vi) tax status; and (vii) investment objectives.
5) The rule defines three types of suitability which must be understood and abided by: (i) Reasonable product; (ii) Customer specific; and (iii) Numerical or quantitative suitability, i.e., that the number of recommended transactions is not excessive;
6) Broker-dealers and registered representatives are allowed an exemption to its “Reasonable-basis” suitability obligation for the purposes of an institutional customer (defined under NASD Rule 3110 (c)(4)) when the BD or RR has basis to believe the customer is capable of evaluating investment risks independently, and when the institutional customer “affirmatively acknowledges that it is exercising independent judgment.” Such an acknowledgment will not, however, release the firm from its other suitability obligations;
7) Customer-specific and Quantitative-suitability are always applicable whether the client be to institutional or retail; and
8) In determining whether a communication is a “recommendation” for purposes of the rule, FINRA considers the content, the context and presentation; the more tailored to a particular customer or customers, the more likely it is to be considered a recommendation by the broker-dealer or representative; A series of actions which may not be considered a recommendation individually may still amount to a recommendation when taken in the aggregate.
May Law, PC is a securities and commodities boutique firm that has a an extensive knowledge of FINRA related rules and assists registered broker-dealers (BDs) and associated persons (APs) in responding to FINRA investigations, disciplinary matters and routine “on the record” interviews (OTRs). The firm also assists broker-dealers draft and revise compliance, supervisory manuals and written supervisory procedures. The firm’s website is located at www.maylawpc.net, and the main number is 847-675-1052. Andrew May has been practicing law for 16 years and can be contacted at firstname.lastname@example.org.
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