Finra has released NTM 12-55 to further clarify the recently updated suitability Rule 2111. (Finra) Some key takeaways:
- The term "customers" does not include other broker-dealers;
- The suitability rule applies to recommendations made to potential clients who become clients and execute the recommended trade or strategy at the recommending firm;
- The suitability rule applies to recommended strategies, such as the general use of margin, even if there is no specific investment recommendation made;
- The suitability rule applies to explicit recommendations to hold securities or to continue with an investment strategy (Finra uses an example of a quarterly review meeting with a client where the Registered Representative explicitly advises the client not to sell any securities or to continue their existing investment strategy.);
- The suitability rule applies to recommendations to sell securities in order to raise funds to purchase non-securities.
See our previous coverage of suitability Rule 2111 here.
Compliance departments need to update their policies and procedures to reflect these clarifications and to monitor RR activity regarding: investment strategies, hold recommendations, and sell recommendations to purchase non-securities.