In its Regulatory Notice 12-55, the Financial Industry Regulatory Authority ("FINRA") has updated its guidance on FINRA Rule 2111 concerning suitability.
This is FINRA's fourth regulatory notice concerning the rule -- it previously published Regulatory Notice 12-25, Regulatory Notice 11-25, and Regulatory Notice 11-02 -- but this notice takes the rule in a slightly different direction, at least appearing to soften enforcement of the rule. This guidance is important to brokers and advisors, particularly because Rule 2111 is reported to have been the "most common ground for disciplinary action this year."1
Rule 2111 requires, in pertinent part, that "[a] member or an associated person 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." The rule goes on to clarify that "[a] customer's investment profile includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation." It is based on NASD Rule 2310.
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