On June 19, 2020, FINRA issued Regulatory Notice 20-18 announcing how its suitability rule will exist alongside the SEC’s Regulation Best Interest (“Reg BI”).
Reg BI, which is set to become effective on June 30, 2020, establishes a “best interest” standard of conduct for recommendations to retail customers regarding any security, investment strategy, or account. You can view our latest alert on this topic here. As stated by FINRA, Reg BI “incorporates and enhances principles that are also found in FINRA Rule 2111 (Suitability).” Id. at 1. Accordingly, “[t]o provide clarity on which standard applies and to avoid unnecessary duplication,” FINRA has amended its suitability rule to expressly state that the rule “shall not apply to recommendations subject to” Reg BI. Id.
The suitability rule is not dead, however. FINRA notes suitability protections are still needed in some situations that are not covered by Reg BI. For example, Reg BI applies only to recommendations to “retail customers,” which is defined as a natural person (or the legal representative of a natural person) who uses an investment recommendation “primarily for personal, family, or household purposes.” See 17 CFR 240.15l-1(b) (1). Thus, recommendations made to entities and institutions will not be subject to Reg BI and will still be subject to FINRA’s suitability standard. Likewise, recommendations made to natural persons who do not use the recommendations “primarily for personal, family, or household purposes (e.g., small business owners and charitable trusts)” will still be governed under FINRA’s suitability standard. See Regulatory Notice 20-18, at FN 5.
FINRA also notes that other rules “that have a suitability or suitability-like component” will remain in full force. Id. These include the rules related to recommendations of Options (FINRA Rule 2360) and Deferred Variable Annuities (FINRA Rule 2330).
The amended suitability rule goes into effect the same day as Reg BI – June 30, 2020.