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FINRA Amends Suitability, CAB Rules to Align With Reg BI

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The Securities and Exchange Commission has approved FINRA’s plan to amend its suitability and noncash compensation rules to provide clarity on which standard applies and to address inconsistencies with Regulation Best Interest.

Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.

As the Financial Industry Regulatory Authority, or FINRA, explains, among other things, Reg BI incorporates and enhances principles that are also found in FINRA Rule 2111, its Suitability rule.

“To provide clarity over which standard applies, FINRA has amended its suitability rule to state that Rule 2111 does not apply to recommendations that are subject to Reg BI,” FINRA states.

FINRA’s changes: (1) amend the FINRA and capital acquisition broker, or CAB, suitability rules to state that the rules do not apply to recommendations subject to Reg BI, and to remove the element of control from the quantitative suitability obligation; and (2) conform the rules governing noncash compensation to Reg BI’s limitations on sales contests, sales quotas, bonuses and noncash compensation.

The changes are effective on June 30, Reg BI’s effective date.