FINRA Regulatory Notice 13-31: Examination Approaches, Common Findings and Effective Practices for Complying with Suitability Rule (with Lofchie Comment)

FINRA issued a regulatory notice to summarize observations from recent FINRA examinations, which reviewed firms' compliance with FINRA Rule 2111 ("Suitability").

The regulatory notice explains that, since Rule 2111 became effective in July 2012, most firms have updated their policies, procedures and systems, and trained staff to be compliant with the Rule (which was expanded from the prior suitability rule); however, some firms had compliance deficiencies, the most frequent being inadequate procedures for hold recommendations. In particular, FINRA found that some firms had trouble supervising and documenting hold recommendations. In the regulatory notice, FINRA made hold and other investment strategy recommendations among other suggestions for compliance with Rule 2111.

Lofchie Comment: This is an extremely significant notice and should be carefully reviewed by all firms that do customer-facing business. It provides a very good, short summary of the types of suitability obligations to which firms are subject; asks a number of big-picture questions as to the types of firm-wide compliance processes involved; lists a number of problems that have come up in examinations; and describes how firms have dealt with a number of the new suitability requirements, including the requirement that "hold" recommendations are subject to a suitability requirement.

See: FINRA Regulatory Notice 13-31.See also: Lofchie's Guide to Broker-Dealer Regulation, Chapter 5: Dealings with Customers. Related News: FINRA: Guidance on FINRA's Suitability Rule (with Lofchie Comment) (December 10, 2012) Additional Guidance on FINRA's New Suitability Rule (FINRA Regulatory Notice) (May 21, 2012).