Suitability Standard

What Is Suitability?

FINRA Rule 2111 requires a reasonable basis for suitable securities recommendations based on the customer's investment profile. Rule 2111 expressly does not apply to recommendations subject to Regulation Best Interest.

Three Suitability Components

Relevant profile factors include age, other investments, financial needs, tax status, objectives, experience, time horizon, liquidity needs and risk tolerance. Institutional customer-specific treatment has particular independent-evaluation requirements.

Reg BI and Advisory Duties

Broker-dealer retail securities and account recommendations are generally subject to Reg BI. Disclosure alone or a merely suitable product does not satisfy its disclosure, care, conflict-of-interest and compliance obligations. Compensation cannot be placed ahead of the customer's interest.

Investment advisers owe duties of care and loyalty throughout the agreed advisory relationship. Neither compensation method nor the cheapest fee alone determines compliance. Dual registrants must identify their capacity.

Exam Focus

First identify the client, recommendation and professional capacity. Then apply the relevant conduct standard. Do not treat present-day retail brokerage recommendations as governed only by the historical suitability standard.

FINRA Rule 2111 and SEC Reg BI guide.