Suitability obligations are critical to ensuring investor protection and promoting fair dealings with customers and ethical sales practices. FINRA Rule 2111 governs suitability obligations and took effect in July 2012.
FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.
The rule states that the 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 [and] risk tolerance,” among other information. A broker’s “recommendation,” which is based on the facts and circumstances of a particular case, is the triggering event for application of the rule.
Brokers must have a firm understanding of both the product and the customer, according to Rule 2111. The lack of such an understanding itself violates the suitability rule.
Also included in Rule 2111 are the three main suitability obligations for firms and associated persons.
- Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
- Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.
- Customer-specific suitability requires that a broker, based on a particular customer’s investment profile, has a reasonable basis to believe that the recommendation is suitable for that customer. The broker must attempt to obtain and analyze a broad array of customer-specific factors.
- Quantitative suitability requires a broker with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.
If you have questions about the suitability rule, please contact James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC) at (202) 728-8270 or Matthew E. Vitek, Associate General Counsel, OGC, at (202) 728-8156.
Below is information on general and product-specific suitability rules, guidance and regulatory notices. Also included are Investor Education resources and interpretive letters.
|FINRA Orders RBC to Pay Fine and Restitution Totaling More Than $1.4 Million for Unsuitable Sales of Reverse Convertibles|
FINRA found that RBC failed to have supervisory systems reasonably designed to identify transactions for supervisory review when reverse convertibles were sold to customers, in violation of FINRA's rules as well as the firm's own suitability guidelines.
|FINRA Sanctions Brookville Capital Partners $1.5 Million and Bars President Anthony Lodati for Fraud|
Firm Ordered to Pay Full Restitution of More Than $1 Million to Customers
|FINRA Rule 2360(b)(19) (Options – Suitability)||Rule||12-11-2014|
|FINRA Rule 2330 (Members' Responsibilities Regarding Deferred Variable Annuities)||Rule||12-01-2014|
|FINRA Rule 2111 (Suitability)|
(a) A member or an associated person must 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...
|Regulatory Notice 13-45|
FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers
|Regulatory Notice 13-31|
FINRA Highlights Examination Approaches, Common Findings and Effective Practices for Complying With its Suitability Rule
|Interpretive Letter to Brian Sweeney, Trustmont Financial Group, Inc.|
FINRA Rule 2111 – Suitability
|Regulatory Notice 12-55|
Guidance on FINRA’s Suitability Rule
|FINRA Rule 2111 (Suitability) FAQ|
Introduction The following frequently asked questions (FAQs) provide guidance on FINRA Rule 2111 (Suitability). This document consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic. New FAQs will be identified when added. Overview FINRA Rule 2111
|Regulatory Notice 12-25|
Additional Guidance on FINRA’s New Suitability Rule
|Regulatory Notice 12-03|
Heightened Supervision of Complex Products
|FINRA Rule 2370(b)(19) (Security Futures – Suitability)||Rule||12-05-2011|
|Regulatory Notice 11-25|
New Implementation Date for and Additional Guidance on the Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
|Regulatory Notice 11-02|
SEC Approves Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
|Regulatory Notice 10-22|
Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings
|FINRA Rule 2310(b)(2) (Direct Participation Programs – Suitability)||Rule||08-17-2009|
|FINRA Rule 2353 (Trading in Index Warrants, Currency Index Warrants, and Currency Warrants – Suitability)||Rule||02-17-2009|
|Regulatory Notice 07-43|
FINRA Reminds Firms of Their Obligations Relating to Senior Investors and Highlights Industry Practices to Serve these Customers
|Notice to Members 05-50|
Member Responsibilities for Supervising Sales of Unregistered Equity-Indexed Annuities
|Notice to Members 05-26|
NASD Recommends Best Practices for Reviewing New Products
|Notice to Members 04-89|
NASD Alerts Members to Concerns When Recommending or Facilitating Investments of Liquefied Home Equity
|Notice to Members 04-30|
NASD Reminds Firms of Sales Practice Obligations In Sale of Bonds and Bond Funds
|Notice to Members 03-07|
NASD Reminds Members of Obligations When Selling Hedge Funds
|Notice to Members 01-23|
Suitability Rule and Online Communications