FINRA on Tuesday clarified what the terms “customer” and “investment strategy” mean in its suitability rule, which became effective on July 9.
The clarifications are updates to FINRA’s Regulatory Notice 12-25, which was issued in May and provides guidance on the rule in a “frequently asked questions” format.
FINRA has also created a web page specifically for its suitability rule, Rule 2111.
The updated Notice 12-55 says that the suitability rule does apply when a broker-dealer or registered rep makes a recommendation to a “potential investor who then becomes a customer.”
For instance, FINRA states that when a registered rep “makes a recommendation to purchase a security to a potential investor, the suitability rule would apply to the recommendation if that individual executes the transaction through the broker-dealer with which the registered rep is associated or the broker-dealer receives or will receive, directly or indirectly, compensation as a result of the recommended transaction.”
However, the suitability rule would not apply to the recommendation in the example above “if thepotential investor does not act on the recommendation or executes the recommended transaction away from the broker-dealer with which the registered rep is associated without the broker-dealer receiving compensation for the transaction.”