Legal Alerts

FINRA Issues Additional Guidance on Suitability Rule

12.19.12

Earlier this month, FINRA issued Regulatory Notice 12-55, to provide additional guidance on the new suitability Rule 2111, which took effect on July 9, 2012. In May 2012, FINRA issued Regulatory Notice 12-25, which provided guidance on the rule in a “frequently asked questions” format. According to FINRA, the newly-released Notice 12-55 discusses the terms “customer” and “investment strategy”—two issues discussed in Notice 12-25. In particular, FINRA notes that in addressing the scope of these terms as used in Rule 2111, it has modified answers to questions 6, 7 and 10 in Notice 12-25 and that the new answers “supersede” those previously provided.  

A new question 6(b) asking “Does the suitability rule apply when a broker-dealer or registered representative makes a recommendation to a potential investor” has been added. The short answer according to FINRA is that the rule “would apply when a broker-dealer makes a recommendation to a potential investor who then becomes a customer.” FINRA goes on to note that the rule would not apply to a recommendation if the potential investor “does not act on the recommendation or executes the recommended transaction away from the broker-dealer with which the registered representative is associated without the broker-dealer receiving compensation for the transaction.”  

A new answer to question 7 has also been added. Question 7 asked “The new suitability rule requires that a recommended investment strategy involving a security or securities must be suitable. Can you provide some examples of what would and would not be considered an “investment strategy” under the rule?” In part of its new answer, FINRA adds that the “term would capture an explicit recommendation to hold a security or securities or to continue to use an investment strategy involving a security or securities.” To assist registered representatives in determining whether or not a hold recommendation may have been given, more particular examples are provided.  

Finally, a new question 10(b) has been added which asks, “What are a broker-dealer’s supervisory responsibilities for a registered representative’s recommendations of an investment strategy involving both a security and a non-security investment.” While the posted answer notes that FINRA rules do not dictate the exact manner in which a broker-dealer must supervise this type of strategy, it goes on to caution that supervisory system must be “reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules.” The answer further provides that FINRA understand no two broker-dealers are exactly alike and that “the reasonableness of a supervisory systems will depend on the facts and circumstances.”  

Notice 12-55 is definitely worth a read and can be found by clicking here: 
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p197435.pdf

Contact
LaFromboise, Antoine J.
Communications and Brand Manager
T 612.371.3269

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