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New FINRA Suitability Rule Focuses on Protecting Investors

Investors, especially less-sophisticated ones, may be better protected from unscrupulous stockbrokers who put their interests ahead of their customers. Effective today, federal regulations require stockbrokers to make sure that the investments they recommend to clients are indeed suitable for an investor’s age, financial situation, risk tolerance, investment objectives and other factors.

The rule was written by the Financial Industry Regulatory (FINRA), and is called the Know-Your-Customer Rule, or FINRA Rule 2090; a companion piece to the rule is FINRA Rule 2111. In short, the rule provides another layer of protection to investors, and could give those who’ve lost money because of a bad investment strategy or advice a better chance of financial recovery.

As reported July 8 by Investment News, the new rule has some B-Ds concerned about the broader obligations to oversee customer accounts and investment strategies. In particular is a provision in the new rule requiring brokers to perform reasonable diligence on products, understand those investments and have a reasonable basis to think that a security or investment strategy is “suitable.”

In addition, the new rule goes a step a further to include discussions of investment strategies, not just recommendations for the purchase of a particular security.

The new rule is intended to help investors like Rhonda Waksman. As reported July 1 by the Pittsburgh Tribune, Waksman lost $123,301 in 2009, after her investments tanked. She faulted her investment broker/adviser and filed a claim against CCO Investment Services. In her claim, she alleged that her investment firm advised her to invest in an “aggressive high-risk” municipal bond fund that was “contrary to her investment objectives.”

As a result, Waksman lost $123,301, which she claims was due to the firm’s breach of fiduciary duty, misrepresentations, suitability of the investment and other conduct.

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