Finra dials it back on suitability rule

Dec 16, 2012 @ 12:01 am

By Dan Jamieson

Finra has eased up on a controversial interpretation of its new suitability rule in a move that is bound to make the industry happy.

In guidance issued last Monday, the Financial Industry Regulatory Authority Inc. backtracked from an expansive interpretation, which held that people who were not customers, and investment strategies that did not involve securities, were covered under the suitability rule.

But in Regulatory Notice 12-55, Finra said that the rule applies only to customers who open an account or buy a product for which the brokerage firm receives compensation.

The notice also stated that the suitability rule does not apply to recommendations of non-security products made as part of a broker's outside activities.

However, a firm's “suitability analysis also must be informed by a general understanding of the non-security component of the recommended investment strategy,” Finra said in the notice.

CLARIFICATION

The authority also clarified that the suitability rule generally would not create a continuing duty to monitor an investment or strategy.

The new guidance was welcomed by industry lawyers, who have complained that the earlier guidance, issued in May, caught the industry by surprise.

“Finra should be praised for listening to its member firms and reps,” said Brian Rubin, a partner at Sutherland Asbill & Brennan LLP.

“Under the new guidance, now reps don't have to fear that if they speak with people who aren't customers — such as engaging in idle chat during upcoming holiday parties — they will be charged under the suitability rule,” he said.

The notice is “a helpful clarification on the definition of customer,” said Hardy Callcott, a partner at Bingham McCutchen LLP. “It gives firms more guidance ... on when the suitability obligation applies to a mixed-securities/non-securities transaction,” he added.

djamieson@investmentnews.com Twitter: @dvjamieson

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