Rule 2111 – also known as FINRA’s Suitability Rule – has come a long way in the past few years. The suitability rule is important because it aims to protect investors by ensuring that advisors understand the products they recommend to the appropriate clients. The most recent changes to the rule, however, have broadened the regulatory concerns for firms and advisors.
Since the changes to this rule were originally approved in 2010 and became effective in July of 2012, FINRA has issued several regulatory notices that have sought to answer questions and clarify the guidelines of Rule 2111, including:
- What constitutes a “customer” for purposes of the suitability rule?
- Does the new rule’s “investment strategy” language cover a registered representative’s recommendation involving both a security and a non-security investment?
- What are the conditions under which an implicit recommendation can trigger the suitability rule?
- What is the nature of the obligation under the suitability rule created by a hold recommendation?
One point that has needed the most clarification has been how “hold” recommendations – which may not always be discussed in advisor/client meetings – trigger the application of the new suitability rule. Firms and advisors raised many concerns regarding a firm or advisor’s silence regarding security positions in an account that could be construed as an implicit “hold” recommendation FINRA has released a series of statements to address these questions.
Since the last release, however, FINRA has indicated that it is encouraged with the methods firms have implemented to comply with the rule – it is certainly encouraging to see the organization responding to concerns so effectively.
Has your firm dealt with this? Share your thoughts on this in the comments section!