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.
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.
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see Interpreting the Rules for more information.
- FINRA Amends Its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest
- Sales Practice Obligations With Respect to Oil-Linked Exchange-Traded Products
- FINRA Requests Comment on Proposed Amendments to the Quantitative Suitability Obligation Under FINRA Rule 2111
- FINRA Filing Requirements and Review of Regulation A Offerings
- FINRA Highlights Examination Approaches, Common Findings and Effective Practices for Complying With its Suitability Rule
- Guidance on FINRA's Suitability Rule
- Additional Guidance on FINRA's New Suitability Rule
- Guidance on Social Networking Websites and Business Communications
- New Implementation Date for and Additional Guidance on the Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
- SEC Approves Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
- Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings
- FINRA Reminds Firms of Their Obligations Relating to Senior Investors and Highlights Industry Practices to Serve these Customers
- Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties
- NASD Recommends Best Practices for Reviewing New Products
- NASD Issues Guidance on Section 1031 Tax-Deferred Exchanges of Real Property for Certain Tenants-in-Common Interests in Real Property Offerings
- NASD Alerts Members to Concerns When Recommending or Facilitating Investments of Liquefied Home Equity
- NASD Reminds Firms of Sales Practice Obligations In Sale of Bonds and Bond Funds
- NASD Reminds Members of Obligations When Selling Hedge Funds
- Suitability Rule And Online Communications
- Clarification Of Members' Suitability Responsibilities Under NASD Rules With Special Emphasis On Member Activities In Speculative And Low-Priced Securities
- Members Reminded To Use Best Practices When Dealing In Speculative Securities
- FAQThe 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.April 03, 2019
- Targeted Examination LetterFINRA’s Member Regulation department is conducting a review with respect to products linked to the CBOE’s Volatility Index (VIX). The review will focus on the supervisory processes followed by firms to identify and mitigate sales practice risks associated with recommendations to non-institutional purchasers of VIX-linked products.April 09, 2018
FINRA Rule 2111 states that 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.” In addition, FINRA Rule 3110 obligates firms to establish and maintain a system toDecember 01, 2017
- Interpretive LetterRequest for Interpretive Guidance on FINRA Rule 2111 (Suitability) in Relation to EB-5 Program Securities TransactionsAugust 26, 2013
- Interpretive LetterStaff 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 04, 1997
- Interpretive LetterStaff clarification of NASD Notice to Members 96-60 regarding a member's suitability obligation under NASD Rule 2310.January 23, 1997
- FINRA Sanctions Fifth Third Securities, Inc., $6 Million for Cost and Fee Disclosure Failures and Unsuitable Recommendations Related to Variable Annuity ExchangesMay 08, 2018
- November 09, 2017
- FINRA Sanctions Oppenheimer & Co. $2.9 Million for Unsuitable Sales of Non-Traditional ETFs and Related Supervisory FailuresJune 08, 2016
- April 19, 2016
- FINRA Sanctions Barclays Capital, Inc. $13.75 Million for Unsuitable Mutual Fund Transactions and Related Supervisory FailuresDecember 29, 2015
- FINRA Sanctions Santander Securities LLC $6.4 Million for Supervisory Failures Related to Sales of Puerto Rican BondsOctober 13, 2015
- FINRA Sanctions UBS Puerto Rico $18.5 Million for Supervisory Failures Regarding Sales of Puerto Rican Closed-End Funds and Related LoansSeptember 29, 2015
- FINRA Sanctions 10 Former Global Arena Representatives as a Result of FINRA Crackdown on Broker MigrationSeptember 15, 2015
- August 06, 2015
- FINRA Orders RBC to Pay Fine and Restitution Totaling More Than $1.4 Million for Unsuitable Sales of Reverse ConvertiblesApril 23, 2015
- FINRA Sanctions Brookville Capital Partners $1.5 Million and Bars President Anthony Lodati for FraudMarch 12, 2015
- January 14, 2015
- FINRA Orders J.P. Turner to Pay More Than $700,000 in Restitution for Unsuitable Sales of Leveraged and Inverse ETFs and for Excessive Mutual Fund SwitchingDecember 05, 2013
- FINRA Orders Wells Fargo and Banc of America to Reimburse Customers More Than $3 Million for Unsuitable Sales of Floating-Rate Bank Loan FundsJune 04, 2013
- FINRA Bars Florida Broker for Unsuitable Recommendations and Unapproved Securities Transactions Involving 31 NFL PlayersMarch 07, 2013
- FINRA Sanctions David Lerner Associates $14 Million for Unfair Practices in Sale of Apple REIT Ten and for Charging Excessive Markups on Municipal Bonds and CMOsOctober 22, 2012
- June 04, 2012
- FINRA Fines Wells Fargo $2 Million for Unsuitable Sales of Reverse Convertibles to Elderly Customers and Failure to Provide Breakpoints on UIT SalesDecember 15, 2011
- FINRA Sanctions Eight Firms and 10 Individuals for Selling Interests in Troubled Private Placements, Including Medical Capital, Provident Royalties and DBSI, Without Conducting a Reasonable InvestigationNovember 29, 2011
- FINRA Orders Chase to Reimburse Customers $1.9 Million for Unsuitable Sales of UITs and Floating-Rate Loan FundsNovember 15, 2011
- FINRA Charges David Lerner & Associates With Soliciting Investors to Purchase REITs Without Fully Investigating Suitability; Lerner Marketed REITs on its Website With Misleading ReturnsMay 31, 2011
- FINRA Fines Santander Securities $2 Million for Deficiencies in Its Structured Product Business and Unsuitable Reverse Convertible SalesApril 12, 2011
- FINRA Fines UBS Financial Services $2.5 Million; Orders UBS to Pay Restitution of $8.25 Million for Omissions That Effectively Misled Investors in Sales of Lehman-Issued 100% Principal-Protection NotesApril 11, 2011
- FINRA Sanctions Two Firms and Seven Individuals for Selling Private Placements Without Conducting a Reasonable InvestigationApril 07, 2011
- FINRA Expels MICG Investment Management and Bars MICG's CEO for Fraud In Connection With MICG's Venture Strategies Hedge FundMarch 09, 2011
- FINRA Orders Ferris, Baker Watts to Pay Nearly $700,000 for Inappropriate Sales of Reverse Convertible NotesOctober 20, 2010
- September 20, 2010
- FINRA Fines HSBC $375,000 for Unsuitable Sales of Inverse Floating Rate CMOs to Retail Customers and Related Supervisory FailuresAugust 19, 2010
- FINRA Orders SunTrust Investment Services to Pay $1.44 Million for Unsuitable UIT, Closed-End Fund and Mutual Fund TransactionsJuly 22, 2010
- FINRA Orders Westpark Capital to Pay $400,000 for Failing to Supervise Brokers with Histories of Disciplinary Actions, Customer Complaints Who Churned Accounts, Engaged in Unauthorized and Unsuitable TradingMay 06, 2010
- April 20, 2010
- FINRA Fines H&R Block Financial Advisors $200,000 for Inadequate Supervision of Reverse Convertible Notes Sales, Suspends and Fines Broker for Unsuitable Sales to Retired CoupleFebruary 16, 2010
- August 06, 2009
- FINRA Fines Merrill Lynch, UBS for Supervisory Failures in Sales of Closed-End Funds; Customers Get More Than $5 Million in RemediationJuly 28, 2009
- FINRA Fines Bank Broker-Dealers $1.65 Million for Supervisory Failures in Variable Annuity, Mutual Fund and UIT TransactionsJuly 23, 2009
- FINRA Fines NEXT Financial Group $1 Million for Supervisory Failures That Led to Churning of Customer Accounts, Excessive CommissionsJuly 22, 2009
- June 30, 2009
- FINRA Charges Six Former Brookstreet Securities Brokers with Fraud in Connection with Retail Sales of Collateralized Mortgage ObligationsMay 28, 2009
- April 14, 2009
- Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment PromotionMarch 25, 2009
- FINRA Fines Wachovia Units More Than $4.5 Million for Failures Relating to Trust and Mutual Fund SalesFebruary 12, 2009
- FINRA Fines Banorte Securities International $1.1 Million for Improper Sales of Class B Mutual Fund SharesOctober 16, 2008
- September 04, 2008
- FINRA Settles with Five Firms for Supervisory Failures, Improper Mutual Fund Sales to More than 5,300 Households; Tens of Millions of Dollars to be Returned to CustomersFebruary 28, 2008
- February 08, 2008
- FINRA Fines Banc One for Unsuitable Variable Annuity Sales, Inadequate Supervision of Fixed-to-Variable Annuity ExchangesJanuary 29, 2008
- November 06, 2007
- September 10, 2007
- Waddell & Reed, Inc. Agrees to Pay $5 Million Fine, up to $11 Million in Restitution to Settle NASD ChargesRelating to Variable Annuity Switching CampaignApril 29, 2005
- April 27, 2005
- Investor AlertThis Investor Alert focuses on a type of call center called a customer advisory center. It is a center that is staffed by securities professionals who may provide financial planning services, sell securities products, and receive commissions or other financial incentives for doing so. These centers have become common and, in some instances, can be sales-orientated.
- Investor AlertFINRA 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 AlertReverse 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 AlertThe 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.
- Investor AlertBuying 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 AlertIf 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.