Key Takeaways
- FINRA Rule 2111 establishes suitability requirements for broker-dealers.
- Three types of suitability: reasonable-basis, customer-specific, and quantitative.
- Investment profile includes age, financial situation, risk tolerance, and objectives.
- Know Your Customer (KYC) requires gathering comprehensive client information.
- Recommendations must be suitable at the TIME of the recommendation.
- Hold recommendations are subject to suitability analysis.
- Suitability applies to explicit recommendations, not self-directed trades.
- Documentation of suitability analysis is essential for compliance.
Last updated: December 2025
Suitability Obligations
Suitability is a fundamental requirement ensuring that investment recommendations match client needs and circumstances.
FINRA Rule 2111: Suitability
FINRA Rule 2111 requires that a broker-dealer or associated person have a reasonable basis to believe a recommendation is suitable.
Three Components of Suitability
| Component | Requirement |
|---|---|
| Reasonable-Basis Suitability | Recommendation is suitable for at least some investors |
| Customer-Specific Suitability | Recommendation fits THIS customer's profile |
| Quantitative Suitability | Quantity of recommendations is appropriate (anti-churning) |
Reasonable-Basis Suitability
Before recommending ANY security, the representative must:
- Understand the investment
- Know its risks and rewards
- Have a reasonable basis to believe it is suitable for some investors
Customer-Specific Suitability
The recommendation must be appropriate for the specific customer based on:
| Factor | Considerations |
|---|---|
| Investment profile | Age, financial situation, tax status |
| Investment experience | Knowledge, sophistication |
| Time horizon | Short, intermediate, or long-term |
| Liquidity needs | Need for accessible funds |
| Risk tolerance | Ability and willingness to accept risk |
| Investment objectives | Income, growth, preservation, speculation |
Quantitative Suitability
Even suitable individual recommendations become unsuitable if:
- Trading is excessive given the account's objectives
- Turnover ratio or cost-to-equity ratio is too high
- Pattern of trading suggests churning
Know Your Customer (KYC)
Information to Obtain
| Category | Examples |
|---|---|
| Personal | Age, marital status, dependents, occupation |
| Financial | Income, net worth, liquid assets, liabilities |
| Investment | Experience, objectives, risk tolerance |
| Time-related | Investment horizon, liquidity needs |
| Tax situation | Tax bracket, tax-advantaged account eligibility |
Account Opening Requirements
FINRA Rule 4512 requires:
- Customer name and residence
- Age (or date of birth for natural persons)
- Occupation and employer (for natural persons)
- Associated person responsible for the account
- Signature of principal approving account
Customer Information Updates
| Trigger | Action Required |
|---|---|
| Account opening | Obtain initial profile |
| Material change | Update profile information |
| Annual review | Confirm information accuracy |
| Major recommendation | Verify current profile |
Investment Objectives
Common Investment Objectives
| Objective | Focus | Typical Investments |
|---|---|---|
| Capital Preservation | Protect principal | Treasury bills, CDs, money markets |
| Income | Generate current income | Bonds, dividend stocks, REITs |
| Growth | Appreciation over time | Growth stocks, equity funds |
| Growth and Income | Both appreciation and income | Balanced funds, dividend growth |
| Speculation | High returns, high risk | Options, penny stocks, crypto |
Risk Tolerance Levels
| Level | Description | Suitable Investments |
|---|---|---|
| Conservative | Minimal risk, preserve capital | Government bonds, money markets |
| Moderate | Balanced risk/return | Diversified funds, investment-grade bonds |
| Aggressive | Higher risk for growth | Small-cap stocks, sector funds |
| Speculative | Maximum risk, potential high returns | Options, leveraged ETFs |
When Suitability Applies
Suitability IS Required For:
| Situation | Reason |
|---|---|
| Explicit recommendations | Direct advice to buy, sell, or hold |
| Implicit recommendations | Suggestions through actions or statements |
| Account type recommendations | Suggesting margin, options accounts |
| Investment strategy | Recommending specific strategies |
| Hold recommendations | Advising to continue holding |
Suitability NOT Required For:
| Situation | Reason |
|---|---|
| Unsolicited orders | Customer-initiated trades |
| Self-directed accounts | Customer makes all decisions |
| General education | Not a specific recommendation |
| Order execution only | No recommendation made |
Suitability Documentation
Record Requirements
| Document | Purpose |
|---|---|
| New account form | Initial customer profile |
| Suitability notes | Rationale for recommendations |
| Correspondence | Communications about recommendations |
| Account updates | Changes to customer profile |
Best Practices
- Document reasoning for each recommendation
- Record customer's stated objectives
- Note any customer-provided limitations
- Keep records of suitability discussions
Exam Tip: The three types of suitability are reasonable-basis, customer-specific, and QUANTITATIVE. Suitability applies to recommendations, NOT unsolicited orders. KYC information must be obtained at account opening and updated as needed.
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Test Your Knowledge
Which type of suitability requires understanding that an investment is appropriate for at least some investors?
A
B
C
D
Test Your Knowledge
A customer places an unsolicited order for a speculative stock. The representative:
A
B
C
D
Test Your Knowledge
Quantitative suitability is primarily designed to prevent:
A
B
C
D
Test Your Knowledge
Which of the following is NOT typically part of a customer's investment profile?
A
B
C
D
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