On July 9, 2012, FINRA’s new Rule 2111 became effective. The new Rule requires that a broker-dealer or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.“
The rule also codifies 3 obligations previously governed by case law:
1) reasonable-basis suitability
-a broker must perform reasonable due diligence on the security or investment and determine risks and rewards and determine whether the recommendation is suitable for at least some investor.
2) customer-specific suitability
– a broker must have a reasonable basis to believe the investment is suitable for a particular investor’s profile.
3)quantitative suitability
– a broker who has control over a customer account must have not believe that a series of recommended transactions are not excessive.
FINRA, also clarified that the elimination of the ban on general solicitation in Rule 506 of Regulation D effected by the JOBS Act does not mean that brokers no longer have suitability obligations regarding private placements. The JOBS Act removes certain marketing impediments but not a broker-dealer’s suitability obligations.
For more guidance on this rule, see FINRA Regulatory Notice 12-25.
Author: Jennifer Trowbridge, Stoecklein Law Group, LLP
Jennifer Trowbridge