Suitability Obligation under FINRA Rule 2111

FINRA Rule 2111 (Suitability) imposes three main suitability obligations on broker-dealers and their associated persons:

  1. Reasonable-Basis Suitability (a reasonable basis to believe, based on reasonable due diligence, that a recommendation is suitable at least for some investors)
  2. Customer-Specific Suitability (a reasonable basis to believe that a recommendation is suitable for the specific customer based on the customer’s investment profile
  3. Quantitative Suitability (a reasonable basis to believe, when possessing actual or de facto control over a customer account, that a series of recommended transactions are not excessive or unsuitable for the customer in the customer’s investment profile)

We discuss each of these suitability obligations in greater detail below.

Reasonable-Basis Suitability

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FINRA Rule 2111: Getting to Know Your Client

Suitability is one of the most important concepts for an investment professional to understand.  Before an investment professional can make recommendations or decisions on behalf of an investor, he must understand what investments are suitable for the investor’s account.  The purpose of FINRA establishing the suitability standard, FINRA Rule 2111, is so that brokers deal fairly with their customers.  FINRA Rule 2111 states that firms and their associated persons “must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer.” Read More…