Series 99: 1.2.1.2 Suitability

Taken from our Series 99 Top-off Online Guide

1.2.1.2 Suitability

Broker-dealers cannot open an account for a new customer until they have completed a suitability analysis based on the customer’s personal and investment profile. The broker-dealer must exert reasonable efforts to obtain this information. Not until a registered principal has approved the suitability analysis can the broker-dealer work up an investment strategy for the customer and recommend transactions.

Suitability information includes a customer’s age, investment experience, liquidity needs, risk tolerance, net worth, investment objectives, other holdings, estimated annual income, and tax status.

Specifically, FINRA requires brokers to consider the following three suitability obligations when making a recommendation:

1. Reasonable-basis obligation. A broker-dealer must understand the complexity and risks of a security or investment strategy and consciously determine whether it is suitable for at least some investors. If a member firm or its brokers and dealers do not understand the risks and mechanics of mortgage-backed securities, for example, it is a suitability violation to recommend them to investors.
2. Customer-specific obligation. A broker-dealer must have a reasonable basis to believe that a recommendation is suitable for a particular customer based on the customer’s personal and investment profile. The suitability analysis must evaluate the customer’s investment objectives and time horizon, and her financial status

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