Series 6: 2.1.1.1. Broker-Dealer Suitability Rules

2.1.1.1.  Broker-Dealer Suitability Rules

Broker-dealers must believe on reasonable grounds that the transactions or strategies they recommend are suitable for an individual customer. Firms may approve an account only after conducting a suitability analysis, based on the firm’s due diligence in understanding the risks of the recommendations it makes and the customer’s personal and investment profile. The firm must make “reasonable efforts” to collect and maintain this information when opening an account.

Specifically, FINRA recognizes three components with regard to suitability obligations:

1. 1. Reasonable-basis obligation. A broker-dealer and registered rep must understand the complexity and risks of a security or investment strategy and consciously determine whether it’s suitable for at least some investors. If a 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. 2. Customer-specific obligation. A broker