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July 24, 2012 at 08:00 PM
A new FINRA rule on suitability of recommendations by brokerages and brokers to customers—and to prospective customers—took effect on July 9, and with it come a number of issues of which firms and advisors alike need to be aware.
Brian Rubin, partner at the law firm Sutherland, said in an interview that one issue is that of the “potential” investor. “In the past when we’ve dealt with suitability,” said Rubin, “it has always been addressing actual customers or clients.” This time, however, guidance that he said many characterize as “bizarre” was issued in May that “talks about potential investors, even if that person doesn’t have an account at the firm.”
Firms that are already concerned about the recommendations made to clients based on their existing portfolios now have this new wrinkle: the prospective customer. While it’s usual for a firm to try to win customers by looking at existing holdings and suggesting possible additional investments and strategies, now that will have to be done in a way more like the way existing customers are treated—which will likely mean considerably more attention to how prospects are approached.
And that doesn’t even touch on those casual conversations that take place over drinks at the club or at parties and other social events. Said Rubin, “I think firms are going to need to address that issue and train reps on the issue, and reps are going to have to be careful when they’re at cocktail parties or swim clubs talking to people about what they do.”
There are two other aspects of the rule, said Rubin, “that are significantly different from the way the suitability and know-your-customer rules have been previously interpreted and applied.” The first of those is “recent guidance that says that brokers’ recommendations have to be in the customer’s ‘best interests.’”
In the past, Rubin explained, the phrase “best interests” denoted the fiduciary standard, “which doesn’t apply to the normal customer/registered rep experience.” It’s unclear, he added, why FINRA used this wording, although he theorized that “it may be that they’re trying to back-door a fiduciary standard.”
