15.1 Suitability Obligations
Recommendations to retail investors must satisfy rigorous suitability and Best Interest mandates under FINRA Rule 2111, SEC Reg BI, and NASAA Model Rules.
Key NASAA Exam Takeaways
- Three Suitability Obligations: Reasonable-Basis Suitability, Customer-Specific Suitability, and Quantitative Suitability.
- Reasonable-Basis Suitability requires understanding the risks and features of a product to ensure it is suitable for AT LEAST SOME investors.
- Customer-Specific Suitability requires matching the product to the individual client's financial profile, goals, and risk profile.
- Quantitative Suitability prevents excessive trading (churning) when viewed in light of the client's investment profile.
- SEC Regulation Best Interest (Reg BI) elevates broker-dealer standards above traditional suitability: recommendations cannot place firm financial interests ahead of the customer.
- Form CRS (Client Relationship Summary) must be delivered to retail investors at the earliest of recommendation, order placement, or account opening.
Knowledge Checkpoint • Section 15.1
A registered representative thoroughly researches an innovative inverse leveraged cryptocurrency ETN and believes it has valid hedging utility for certain sophisticated investors, but recommends it to a 75-year-old widow seeking safe income. Which suitability obligation did the representative violate?