Significant Changes to FINRA’s Know Your Customer and Suitability Rules to Take Effect in 2011

more+
less-

On November 17, 2010, the Securities and Exchange Commission (SEC) approved two new FINRA rules: Rule 2090 (Know Your Customer) and Rule 2111 (Suitability) to replace NYSE Rule 405 and NASD Rule 2310. These rule changes are significant because they: 1) extend the suitability obligations from solely transaction-based recommendations to include investment strategy; 2) create a suitability obligation where a member/associated person makes “an explicit recommendation to hold a security or securities”; and 3) recognize three distinct suitability obligations: (a) a reasonable-basis suitability, (b) customer-specific suitability and (c) quantitative suitability. FINRA now must issue a Regulatory Notice announcing SEC approval. The implementation date of the new rules most likely will be the Fall of 2011.

Know-Your-Customer Rule (Rule 2090)

FINRA’s new Rule 2090 encompasses many of the provisions contained in former NYSE Rule 405. The new rule requires member firms to “use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.” The know-your-customer obligation arises immediately upon the opening of an account regardless of whether the broker has made a recommendation to the customer. The new rule eliminates the requirement in NYSE Rule 405(1) that the firm/associated person learn the essential facts relative to “every order,” deferring instead to the specific order handling rules (such as FINRA Rule 5310, NASD Rules 2320, 2400). The new rule will delete former NYSE Rule 405(2) (Supervision of Accounts) and (3) (Approval of Accounts) as duplicative of other FINRA rules.

Please see full alert below for more information.

LOADING PDF: If there are any problems, click here to download the file.