In its recent proposal to consolidate NASD and NYSE suitability rules and adopt the NYSE know-yourcustomer requirement (FINRA Regulatory Notice 09-25), FINRA would significantly expand broker-dealers’ suitability obligations. Moreover, in the ongoing regulatory scrimmage about broker-dealers and investment advisers, the proposal seems a transparent attempt by FINRA to assert jurisdiction over certain investment advisory activities.
The proposed suitability rule would require a broker-dealer to have a reasonable basis to believe that a recommended transaction or investment strategy involving a security is suitable. While FINRA cites current interpretive material regarding suitability obligations to institutional customers (IM-2310-3) as precedent, it ignores the explicit application of the current NASD suitability rule solely to transactions, i.e., the recommended purchase, sale or exchange of any security. To compound this jurisdictional scope-creep, FINRA also seeks comment on whether it should propose expanding suitability obligations to all recommendations of investment products, services and strategies, regardless of whether they involve securities.
Additionally, the proposed suitability rule would expand the information a firm must consider in determining suitability to include age, other investments, investment experience, time horizon, liquidity needs, and risk tolerance. The suitability analysis would need to consider not only information disclosed by the customer to the registered representative making the recommendation, but also other information about the customer that is known by the broker-dealer.
Finally, in proposing the adoption of the current NYSE know-yourcustomer rule, FINRA would require firms to use due diligence, in regard to the opening and maintenance of every account, to know essential facts concerning every customer. The obligation would arise at the beginning of the customer/broker relationship, regardless of whether a recommendation has been made, and would continue through the relationship, regardless of whether transactions were effected.