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By: Joyce Mocek
FINRA Rule 2090, effective July 9, 2012, has streamlined and replaced the former NASD Rule 405, the “Know Your Customer” standard. The new rule contains a “reasonable diligence” standard, compared to the old rule requirement of “use due diligence.” Rule 2090 provides that “Every member shall use reasonable diligence, in regard to opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.” “Essential facts” are now defined. The new Rule places additional obligations on member firms to not only comply with the “Know Your Customer” rule when opening an account, but also in maintaining an account.
Working in conjunction with the “Know Your Customer” rule, is a new “Suitability” rule, FINRA 2111. The new Suitability rule, which replaced NASD Rule 2310, expands the scope of information that a broker must attempt to obtain through reasonable diligence. It also requires firms and associated persons to document with specificity their reasonable basis for believing a factor is not relevant in order to be relieved of the obligation to obtain further information on that factor. It expands the suitability obligations and requires “reasonable basis” to believe, based on “reasonable diligence” that an investment is suitable. These new rules expand the obligations of member firms and associated persons, and also provide more clarity and structure in understanding the rules.