FINRA Manual: Contents
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94-33 SEC Approves MSRB Rule G-19 Amendments
On April 7, 1994, the Securities and Exchange Commission (SEC) approved amendments to Municipal Securities Rulemaking Board (MSRB) Rule G-19 concerning suitability of recommendations. The amendments eliminate two provisions that had operated as exemptions to the rule and clarify the information broker/dealers must obtain from customers as well as when it must be obtained. Finally, these changes revise the definition of "institutional account" contained in MSRB Rule G-8.
Rule G-19 contains general standards for broker/dealers making recommendations to customers. Since adoption of these standards, the municipal securities market has seen an increase in the number of retail investors and the introduction of more complex, speculative municipal securities.
Responding to these developments and industry concerns for increased customer protection, the MSRB clarified and strengthened its rules governing what broker/dealers must ask customers and when recommendations are permissible.
Description Of Amendments
Under Rule G-19 a broker/dealer must determine that a proposed transaction is suitable for a customer before making any recommendations to the customer. The amendments to the rule eliminate two provisions that have been interpreted as exemptions from this requirement.
The first provision had permitted a broker/dealer to make a recommendation when a customer fails to provide sufficient personal information, on the customer's financial status or investment objective, as long as the broker/dealer has no reasonable grounds to believe that the recommendation is unsuitable. Now, a broker/ dealer lacking such specific information cannot make an investment recommendation to that customer.
The second deleted provision allowed broker/dealers to recommend specific municipal securities to investors who insisted on investing after being informed that, based on their financial circumstances, the investment would not be suitable. Eliminating this provision clarifies the circumstances under which broker/dealers may make recommendations to customers.
Additional amendments to Rule G-19 concern the information that must be obtained from customers. For non-institutional customers, the rule change clarifies that reasonable efforts must be made to obtain the customer's financial status, tax status, investment objectives, and other information the broker/dealer needs to make recommendations to the customer.
Although the amendment does not specify what must be requested from institutional accounts, the suitability rule itself applies equally to institutional and non-institutional accounts. The rule requires that for each recommendation of a municipal securities transaction, a broker/dealer shall have reasonable grounds, based upon information available from the issuer and facts disclosed by the customer or otherwise known about the customer, to believe that the recommendation is suitable.
Related Amendment To Rule G-8
At the same time, the MSRB revised the definition of "institutional account" contained in Rule G-8 to include the accounts of savings and loan associations, investment advisers registered under Section 203 of the Investment Advisers Act of 1940, and other entities (e.g., a natural person, corporation, partnership, or trust) with total assets of at least $50 million. For purposes of suitability determinations, this change conforms the MSRB's definition of "institutional account" to the definition contained in Article III, Section 21 (c)(4) of the NASD Rules of Fair Practice.
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Questions concerning the Notice may be directed to Brad Darfler, District Coordinator, Compliance Department, (202) 728-8946.