In early January, 2011, the Financial Industry Regulatory Authority (“FINRA”) announced that the Security and Exchange Commission (“SEC”) had approved Rules 2090 – Know-Your-Customer – and 2111 – Suitability for inclusion in FINRA’s consolidated rulebook. The new rules become effective on October 7, 2011.
Rule 2090 is new and is patterned after former NYSE Rule 405(1). The new rule requires member firms to use reasonable diligence, with respect 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 who is acting on behalf of the customer. The former NYSE Rule 405(1) applied only to FINRA members who are also members of the NYSE. The incorporation of the new rule into the FINRA consolidated rulebook will make it applicable to all FINRA member firms.
The new suitability rule, Rule 2111, is based upon the former NASD Rule 2310 – recommendations to customers. Rule 2111 is a substantial improvement over Rule 2310. Rule 2111 expressly applies to recommendations of investment strategies, as well as individual investment transactions. The rule also broadens the reasonable diligence requirements of member firms and associated persons to develop a customer’s investment profile. In addition to a customer’s other holdings, financial situation and needs, tax status and investment objectives, member firms and associated persons must gather and evaluate information concerning a customer’s age, investment experience, time horizon, liquidity needs, and risk tolerance. The phrase “investment strategy involving a security or securities” is to be interpreted broadly and includes, among other things, an explicit recommendation to hold a security or securities. The new rule requires that members and associated persons use reasonable diligence to both obtain and analyze all of the components of an investor’s profile, unless the member or associated person documents with specificity the reasonable basis to believe that one or more of the components is not relevant to the customer’s profile. Finally, the new rule expressly incorporates and describes the three primary suitability obligations of brokerage firms and their associated persons: reasonable-basis, customer-specific, and quantitative suitability.
Johnson, Pope, Bokor, Ruppel & Burns, LLP, the law firm with which Scott Ilgenfritz has been affiliated for 27 years, has offices in Tampa and Clearwater, Florida. The firm’s attorneys have in excess of 60 years experience in representing institutional and individual investors in securities-related litigation and arbitration claims across the country.