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

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

How 401(k) advisers can use 'centers of influence' to grow their business

Leveraging relationships with accounting, benefits, and property and casualty insurance firms can help deliver new business leads for retirement plan advisers.

Latest news & opinion

SEC advice rule may give RIAs leg up over broker-dealers

Experts say advisers will be able to point to their role as fiduciaries as a differentiator in the advice market.

Brokers accept proposed SEC rule on who can call themselves an adviser

Some say the rule will clear up investor confusion, but others say the SEC didn't go far enough.

SEC advice rule seeks to tighten reins on brokers

The proposed rule puts new restrictions on brokers, but it is still unclear how strongly the SEC is clamping down.

SEC advice rule hearing updates

Commission says a lot of work ahead, public will have 90 days to comment.

SEC advice proposal unveiling: Here's what to expect

Chairman Jay Clayton will initiate momentous action Wednesday, as the commission meets to debate a rule on broker and adviser standards.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print