Thursday, August 16, 2012

New Suitability Rules Now in Effect

By Paul Meyer, MA

FINRA was created in 2007 through a combination of the former NASD with the regulatory functions of the NYSE. Since then, FINRA has been attempting to consolidate each entity’s old rules into a single manual. Although progress has been slow, recently new suitability rules took effect. This much-needed update (parts of the old rule date back to 1938) brings the suitability rule a little closer to the realities of business in a modern, full-service securities firm; but it is still a far cry from the uniform fiduciary standard -- the value of which there is near universal agreement.

The new rule essentially incorporates the ethical principals of the old rule and adds two new, but related, concepts: quantitative suitability and portfolio strategy. Quantitative suitability refers to the amount of a security held in relation to the entire portfolio. A suitable strategy, therefore, must incorporate the basic principles of diversification and asset allocation.

The new suitability rules are a codification of investment management principles that have been the proper standard of care for many years. Ultimately the industry must adopt the fiduciary standard.

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