10.1. Types of Suitability

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 they make and the customer’s personal and investment profile. They must make “reasonable efforts” when opening an account to collect and maintain this information.

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

• Reasonable-basis suitability 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.

• Customer-specific suitability obligation. A broker-dealer must have a reasonable basis to believe that a recommendation is suitable for the 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 fina