Dec 11 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
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
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.