FINRA Manual: Contents
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88-97 Implementation of the Form U-4 Disclosure Reporting Page (DRP) Effective Immediately
*These are suggested departments only. Others may be appropriate for your firm.
The NASD is publishing a suggested Customer Suitability Statement and Agreement to Purchase Form to assist members in complying with SEC Rule 15c2-6.
BACKGROUND AND SUMMARY
Effective January 1, 1990, the SEC adopted Rule 15c2-6, the so-called "Penny Stock/Cold Call Rule," in response to widespread unsuitable recommendations and other abusive sales practices by certain broker-dealers involving transactions in low-priced securities not listed on NASDAQ or the exchanges. The rule imposes special suitability and recordkeeping requirements on certain broker-dealers that recommend transactions in designated securities to persons who are not "established customers." Designated securities are generally defined as equity securities of companies having less than $2 million in net tangible assets and are selling below $5 per share. All securities listed on NASDAQ or a national securities exchange in the U.S. are exempt from the rule.
SEC Rule 15c2-6 prescribes specific procedures a firm must follow before such designated securities can be recommended to nonestablished customers. Included is the requirement to obtain from each customer oral or written suitability information detailing such a customer's previous investment experience, investment objectives, and financial situation. The scope of the information gathered is very important. With that information, the firm must reasonably determine whether transactions in these designated securities are suitable for the particular customer.
If the firm determines that the securities are suitable for purchase by the customer, the firm must prepare a written statement of its reasons for making such a determination, deliver it to the customer, and secure a manually signed copy from the customer acknowledging receipt of the firm's suitability determination. The customer also must review and agree that the information contained on the form from which the suitability determination was made accurately reflects the customer's financial situation, investment objectives, and investment experience.
In addition, the firm must obtain the customer's written agreement for the first three purchase transactions involving designated securities. Both the customer suitability statement and the written agreement must be properly executed by the customer and then received by the firm prior to any transactions in designated securities.
NASD members have requested guidance concerning the extent of customer information that must be gathered to make a suitability determination, and the proper text of both the firm's suitability determination and the customer's writ ten agreement for the transaction. To assist members in complying with SEC Rule 15c2-6, the NASD, in collaboration with the SEC staff, is publishing a suggested Customer Suitability Statement and an Agreement to Purchase Form, which follow this notice. Please note that these suggested forms are intended to serve as models, not as requirements for use.
Questions concerning this notice should be directed to Gary Carleton or Daniel Sibears, NASD Compliance Division, at (202)728-8959.