New FINRA Suitability Rule Takes Effect This Month

by Wall Street Fraud on July 9, 2012

securities fraud attorney philadelphiaThe Financial Industry Regulatory Authority will implement new suitability rule on July 9, 2012. The new rule is good news for investors because it places more obligations on brokers to act in the best interests of their clients.

The rule states that broker-dealer or associated person “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 of the [firm] or associated person to ascertain the customer’s investment profile.”

While the new rule largely reflects brokers’ existing obligations, it also codifies three main suitability requirements that were previously only reflected in case law. They are:

  • Reasonable-basis suitability: A broker must perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding;
  • Customer-specific suitability: A broker must have a reasonable basis to believe that a recommendation of a security or investment strategy involving a security or securities is suitable for the particular customer based on the customer’s investment profile; and
  • Quantitative suitability: A broker who has control over a customer account must have a reasonable basis to believe that a series of recommended securities transactions are not excessive.

The new rule also expands the list of customer-specific factors that brokers must attempt to obtain and analyze when making recommendations to customers. The new rule adds a customer’s age, investment experience, time horizon, liquidity needs, and risk tolerance to the explicit list of customer-specific factors from the predecessor rule.

For more on suitability, please stay tuned for tomorrow’s post.

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