FINRA Narrows Suitability Rule
FINRA has provided additional guidance on the suitability rule it adopted last July, providing guidance on the scope of the terms “customer” and “investment strategy.” FINRA defines “customer” for purposes of the suitability rule as a person (not a broker-dealer) who opens a brokerage account or purchases a security where the BD receives compensation. The suitability rule does not apply to a “potential investor” unless such person becomes a customer. The term “investment strategy” triggers the suitability rule when the BD includes recommendations to invest in specific types of securities. A firm could make general recommendations to invest in equities or bonds without a suitability analysis. FINRA also indicated that a recommendation to hold specific securities requires a suitability determination, but a BD does not have an ongoing duty to monitor recommendations. FINRA has created a suitability web page for all FAQs.
OUR TAKE: FINRA has narrowed the “customer” and “investment strategy” as compared to prior guidance. Also, by specifically stating that BDs do not have a continuing obligation to monitor, FINRA has backed away from making suitability similar to a fiduciary standard.