Being a broker dealer in today’s environment is a complicated and complex role. Included in this complexity is ensuring that your broker dealer operates with the highest ethical standards and providing the best possible considerations for your client. Having your client’s best interest at the forefront is essential.
Suitability, in the context of broker dealer relationships, is a fundamental principle that ensures that investment recommendations and strategies align with the client’s specific financial situation, investment objectives, and risk tolerance. By doing this, the broker dealer helps to safeguard the client from unsuitable investments that may not match the client’s financials goals and/or risk tolerance.
One of the Financial Industry Regulatory Authority’s (“FINRA”) key regulations governing a broker dealer’s conduct is FINRA Rule 2111. This rule states that the “broker dealer and/or associated person have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”
A few key components of FINRA Rule 2111 include:
- Reasonable Basis Suitability: The broker dealer has a reasonable basis to believe that a recommended investment is suitable for a client. This means that the broker dealer must conduct thorough due diligence on such investment in order to understand the characteristics, risks, and potential rewards of the investment.
- Customer Specific Suitability: The broker dealer must consider their client’s specific circumstances and needs. This includes factors such as the client’s financial situation, investment goals, risk tolerance, and time horizon when any recommendation is made.
- Risk Disclosure: The broker dealer must communicate the risks associated with any recommended investment with the client. This includes explaining the potential risks associated with it.
FINRA Rule 2111 has greatly improved investor protection and transparency between the client and the broker dealer. Continual training, education, and communication by the broker dealer regarding any investment opportunity is of the upmost importance in a trusting relationship. While there are some challenges, the rule’s implementation has undoubtedly improved investor protection. If your broker dealer would like to discuss its suitability practices, please contact Master Compliance here to speak with one of our compliance professionals. Our team can help your broker dealer with its suitability processes and procedures.