Q: Do the suitability rules apply when I’m selling an investment to a foreign national who’s not even living in the U.S.? Do the U.S. laws apply to people who aren’t even U.S. citizens?
A: Actually, the law doesn’t apply to clients who are foreign nationals, so much as it applies to you as the registered rep or broker-dealer. As long as you’re operating in the U.S. you are obligated to comply with the laws, rules and regulations of the United States.
FINRA is pretty clear on this issue in an interpretive letter dated Aug. 26, 2013: “To the extent that a FINRA member recommends a security or investment strategy involving a security to a foreign national … the suitability rule would apply to the recommendation. The safeguards provided by the suitability rule are no less important where the FINRA member's customers are foreign nationals seeking investment returns and a path to U.S. residency.”
In other words, the FINRA suitability rule doesn’t delineate between U.S. citizens and non-U.S. citizens. In fact, there’s no definition in the rule of who a “client” is. To the contrary, the rule simply states that the recommendation must be suitable for the “customer” without any further clarification of what constitutes a “customer.”
When dealing with any suitability issues, the main concerns are focused on two suitability obligations: reasonable-basis and customer-specific suitability.
Reasonable-basis obligation: As FINRA notes, “a broker-dealer must perform reasonable diligence to understand the nature of a recommended security or investment strategy involving a security, including its potential risks and rewards, and then determine whether there is a reasonable basis to believe the recommended security or investment strategy is suitable for at least some investors.”
Broker-dealers should also, “at a minimum, conduct a reasonable investigation concerning the issuer and its management; the business prospects of the issuer; the assets held by or to be acquired by the issuer; the claims being made; and the intended use of proceeds of the offering,” FINRA said.
Customer-specific obligation: “A broker-dealer must have a reasonable basis to believe that a recommended security or investment strategy involving a security is suitable for a particular customer based on the customer's investment profile. A customer's investment profile includes, but is not limited to, the customer's age, 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 a recommendation,” according to FINRA.
Regardless of who your customer is or where they may reside, you are not relieved of your obligation to know your customers and only recommend investments that are appropriate for them.