New York Securities Lawyer Blog
On July 9, 2011, FINRA implemented a new Suitability Rule codified in the FINRA Manual as Rule 2111. See 75 Fed. Reg. 71479 (Nov. 23, 2010) (Order Approving Proposed Rule Change; Fine No. SR-FINRA-2010-039). Previously, the FINRA Suitability Rule was codified under Rule 2310. According to FINRA Regulatory Notice 12-25, the new rule, in part, requires broker-dealers and/or associated persons to “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.” The phrase “investment strategy involving a security” used in this Rule is to be interpreted broadly and would include an explicit recommendation to hold a security. Thus, the new rule imposes a suitability obligation on brokers when making a recommendation to hold a security. Moreover, the new rules imposes three suitability obligations on FINRA member firms and/or associated persons. The first suitability obligation is reasonable-basis suability which requires that a broker perform reasonable diligence to understand the nature of the recommended security, or investment strategy involving a security, as well as potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based upon that understanding. The second suitability obligation is customer specific suitability requirement which requires that a broker must have a reasonable basis to believe that a recommendation of a security, or investment strategy involving a security, is suitable for the particular customer based on the customer’s investment profile. This addition to the rule adds several customer-specific factors to the predecessor rule including a customer’s age, investment experience, time horizon, liquidity needs and risk tolerance. The third suitability obligation is a quantitative suitability requirement which requires a broker who has control over a customer account to have a reasonable basis to believe that a series of recommended securities transaction are not excessive. If you believe your firm and/or broker invested in securities, or implemented an investment strategy involving a security, that violated this suitability rule, please contact Lax & Neville LLP for a free consultation.