FINRA recently published Regulatory Notice 12-25 to provide broker-dealers with additional guidance on the SRO’s new suitability rule, which took effect on July 9th. The new suitability standards under Rule 2111 were approved by the SEC in November, 2010. They were initially scheduled to take effect on October 7, 2011, but the deadline was extended in response to requests from the industry for more implementation time. The recent release responds to requests from FINRA member firms for additional direction on issues they identified during the implementation process. The release also provides useful information concerning the implementation of a risk-based approach to documentation of suitability compliance and the scope of appropriate information gathering from clients.
The new suitability Rule makes absolutely clear that a broker-dealer’s suitability obligations include firmly understanding both the customer and the products recommended to customers. The Rule codifies and clarifies the three main suitability obligations of broker-dealers and their registered representatives, previously discussed only in case law:
- Reasonable-basis suitability –brokers must perform reasonable diligence to understand the nature of the recommended security, including its potential risks and rewards and whether it would be a suitable investment for any investor.
- Customer-specific suitability – this obligation looks to the customer’s investment profile. The broker must have a reasonable basis to believe that the recommended security is suitable for the particular customer.
- Quantitative suitability – requires a broker who has actual, or de facto, control of a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and/or unsuitable for the customer.
The Rule also sets forth an expanded list of customer-specific factors that must be obtained and analyzed by firms as part of their suitability inquiry, including age, investment experience, time horizon, liquidity needs and risk tolerance.
For additional information concerning the new suitability rule please contact Sarah Weber at email@example.com or (619)298-2880.