FINRA clarifies questions about advice to potential clients

Tue Dec 11, 2012 1:29pm EST

Dec 11 (Reuters) - New guidance of a rule by Wall Street's industry-funded watchdog clarifies a key question about the responsibilities that securities brokers have to prospective clients.

The rule, which broadened a broker's responsibilities to make so-called "suitable" recommendations to customers, will not apply to potential investors, unless they become customers, the Financial Industry Regulatory Authority wrote in a guidance published on Monday. Even then, the investor would have to execute the recommendation and the broker would have to receive compensation, FINRA wrote.

FINRA's clarification comes after months of worry among brokerages about a new suitability rule that went into effect on July 9. The rule requires that a broker's recommendations for investments and strategies be suitable for customers at all times - based on factors such as age and risk tolerance - and not just at the time of the transaction.

Earlier guidance from FINRA said that "customers" included even prospective investors who do not yet have an account with a broker's firm. This interpretation raised concerns among industry professionals, who said it would increase liability risks for brokers as they build up business. Brokers typically review a potential client's existing portfolios and make recommendations that could help win the account.

Investors who file arbitration claims to recover losses from brokerages typically argue, among other things, that the recommendation was not "suitable."

FINRA's guidance also explicitly clarifies that the suitability rule would not apply if a potential investor executes a broker's recommendation at another firm and that broker does not receive a commission, FINRA wrote.

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