A new rule for brokers goes into effect today. The Financial Industry Regulatory Authority, or FINRA, issued new suitability rules for brokers back in January 2011.

The suitability standard is the level of care brokers are required to give their clients. Investments must be suitable for clients based on several categories. With the new rule, those categories have expanded.

Brokers will now need to know more about their clients. They will have to judge the suitability of investments based on “other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation,” according to FINRA rule 2111.

Not only that, but investment strategies must now be judged for suitability based on the new rule, which may cause some confusion in the beginning.

Here’s what a July 3 story on InvestmentNews.com, “New FINRA suitability rules worry industry” said about it:

Perhaps of most concern to broker-dealers, the rule imposes suitability obligations on investment strategies. In its rule filing, the Financial Industry Regulatory Authority Inc. said the term “investment strategy” would be interpreted broadly and cover a recommendation to hold an investment as well as a “buy” or “sell” recommendation.

Brokers then got another curveball in the May 2012 guidance released by FINRA on the new suitability rule in a section titled “Acting in a customer’s best interest.” It’s not quite on par with a fiduciary standard, but it is a nudge in that direction.

From the FINRA regulatory notice 12-25:

The requirement that a broker’s recommendation must be consistent with the customer’s best interests does not obligate a broker to recommend the “least expensive” security or investment strategy (however “least expensive” may be quantified), as long as the recommendation is suitable and the broker is not placing his or her interests ahead of the customer’s interests. Some of the cases in which FINRA and the SEC have found that brokers placed their interests ahead of their customers’ interests involved cost-related issues. The cost associated with a recommendation, however, ordinarily is only one of many important factors to consider when determining whether the subject security or investment strategy involving a security or securities is suitable.

Explicitly stating that investments and strategies should be in the best interest of the client seems like a good thing. What do you think?

Get more CD and Investing News with our free weekly newsletter.

Follow me on Twitter @SheynaSteiner.

Promoted Stories