FINRA Issues Guidance Regarding the Revised Suitability Rule that Governs Investment Recommendations to Customers

FINRA has issued Regulatory Notice 13-31 to provide guidance to brokerage firms, financial advisors and other securities industry employees regarding the revised “suitability” rule that became effective in July 2013.

The suitability rule mandates that when brokerage firms and financial advisors make recommendations to investors to buy, sell or hold investments, they must “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 member or associated person to ascertain the customer’s investment profile.” Firms must obtain accurate information concerning the customer’s age, investment experience, time horizon, liquidity needs and risk tolerance—when making recommendations.

FINRA’s guidance to firms spells out the approach it takes in conducting examinations to confirm compliance with the suitability rule and identify shortcomings.

As FINRA explains, “Examinations for compliance with the suitability rule typically begin with an analysis of a firm’s controls. This is largely based on interviewing principals responsible for preparing the firm’s policies and procedures for this area and, considering the products the firm sells and the types of customers with which the firm conducts business, assessing the firm’s readiness to control risks related to suitability.”

The Regulatory Notice goes on to explain that “FINRA examiners tested supervisory and compliance systems and determined that firms, in general, implemented reasonable approaches regarding suitability. The depth and breadth of FINRA examiner testing is generally determined by the supervisory systems and controls the firm developed, the products and strategies the firm recommends, the firm’s business activities, the firm’s customer base, and other relevant information considered by FINRA staff during the examination planning and execution process.”

To review the full notice, please follow this link.

If you are an investor or financial advisor with questions about the suitability rule and the compliance standards set out by FINRA, you should contact us at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation.