Topic Page

Suitability

Suitability obligations are critical to ensuring investor protection and promoting fair dealings with customers and ethical sales practices. FINRA Rule 2111 governs general suitability obligations, while certain securities are covered under other rules that may contain additional requirements.

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.

Suitability Obligations

Rule 2111 lists 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 to support this determination.
  • 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.

Comments?

Did you find what you were looking for? Do you have suggestions for how to make this page better? Tell our webmaster.

FINRA Provides Guidance on Firm Responsibilities for Sales of Pension Income Stream Products
April 18, 2016
FINRA Highlights Examination Approaches, Common Findings and Effective Practices for Complying With its Suitability Rule
September 25, 2013
Guidance on FINRA’s Suitability Rule
December 10, 2012
Additional Guidance on FINRA’s New Suitability Rule
May 18, 2012
Heightened Supervision of Complex Products
January 17, 2012
New Implementation Date for and Additional Guidance on the Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
May 18, 2011
SEC Approves Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
January 10, 2011
Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings
April 20, 2010
FINRA Reminds Firms of Their Obligations Relating to Senior Investors and Highlights Industry Practices to Serve these Customers
September 10, 2007
NASD Recommends Best Practices for Reviewing New Products
April 6, 2005
NASD Issues Guidance on Section 1031 Tax-Deferred Exchanges of Real Property for Certain Tenants-in-Common Interests in Real Property Offerings
March 2, 2005
NASD Alerts Members to Concerns When Recommending or Facilitating Investments of Liquefied Home Equity
December 8, 2004
NASD Reminds Firms of Sales Practice Obligations In Sale of Bonds and Bond Funds
April 13, 2004
NASD Reminds Members of Obligations When Selling Hedge Funds
January 23, 2003
Suitability Rule and Online Communications
March 18, 2001
Members Reminded to Use Best Practices When Dealing in Speculative Securities
May 1, 1996
Podcast
This podcast covers examination approaches, common findings, and effective practices for complying with FINRA’s suitability rule.
December 17, 2013
Webinar
This webinar focuses on implementation of new FINRA Rules 2111 (suitability) and 2090 (know your customer), which become effective July 9, 2012
September 21, 2013
Rule Interpretation
Request for Interpretive Guidance on FINRA Rule 2111 (Suitability) in Relation to EB-5 Program Securities Transactions
August 26, 2013
FAQ
This FAQ consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic.
December 10, 2012
Podcast
This is the final podcast in a three-part series on additional guidance about FINRA's new consolidated suitability and know your customer rules.
July 25, 2011
Podcast
This podcast is the second in a three-part series on additional guidance about FINRA's new consolidated suitability and know your customer rules.
July 18, 2011
Podcast
This podcast is the first in a three-part series on additional guidance about FINRA's new consolidated suitability and know your customer rules.
July 11, 2011
Podcast
FINRA staff highlights FINRA Rules 2111 (Suitability) and 2090 (Know Your Customer).
March 21, 2011
Rule Interpretation
Staff clarification of NASD Notice to Members 96-60 regarding a member's suitability obligation under NASD Rule 2310 with respect to certain investment company transactions.
March 4, 1997
Rule Interpretation
Staff clarification of NASD Notice to Members 96-60 regarding a member's suitability obligation under NASD Rule 2310.
January 23, 1997
Investor Alert
Buying mutual funds through a broker or other investment professional usually means choosing among different mutual fund classes. The only differences among these classes is how much you will pay in expenses and how much your broker will be paid for selling you the fund.
Investor Alert
Some securities firms use call centers to provide support for a variety of administrative and customer service issues. Some firms, especially discount brokers, utilize call centers to accommodate self-directed investors.
Investor Alert
Private placement offerings can be a key source of capital for American businesses. But investing in private placements is risky and can tie up your money for a long time. As with other investments, you can also lose some or all of your money.
Investor Alert
FINRA is reissuing this Alert because of concern—reflected in a recent enforcement action—that some investors may be the recipients of misleading information regarding certain public non-traded REITS. Some investors may also receive recommendations to purchase these products without adequate investigation by the firm or individual broker to determine whether these or similar investments are suitable.
Investor Alert
Reverse convertibles are debt obligations of the issuer that are tied to the performance of an unrelated security or basket of securities. Although often described as debt instruments, they are far more complex than a traditional bond and involve elements of options trading. FINRA is issuing this alert to inform investors of the features and risks of reverse convertibles.
Investor Alert
If you have a life insurance or annuity contract, you may have been approached to exchange it for a new model, one with better or the latest features. You need to know that even though tax law makes the exchange income tax free and the new contract may sound better for you, you may be losing - not gaining - if you make the exchange.
Investor Education
FINRA has prepared this document to educate investors about our suitability rule—and to explain the reasons why firms and their associated persons may ask their customers questions about their financial situation.
Investor Education
FINRA has prepared this document to educate investors about our suitability rule—and to explain the reasons why firms and their associated persons may ask their customers questions about their financial situation.
Investor Alert
The marketing efforts used by some variable annuity sellers deserve scrutiny - especially when seniors are the targeted investors. Sales pitches for these products might attempt to scare or confuse investors.