12.2 Suitability & Regulation Best Interest (Reg BI)
Suitability and Reg BI form the core of client recommendation rules. Every recommendation must be matched against the customer's financial profile, investment horizon, liquidity needs, and risk tolerance.
Key FINRA Exam Takeaways
- SEC Regulation Best Interest (Reg BI): Broker-dealers must act in the retail customer's best interest at the time of recommendation without placing the firm's interest ahead.
- Form CRS (Customer Relationship Summary): 2-page disclosure delivered at or before the earliest recommendation, detailing services, fees, conflicts, and disciplinary history.
- FINRA Rule 2111 Three Suitability Obligations: 1. Reasonable-Basis Suitability (product is suitable for SOME investors); 2. Customer-Specific Suitability (suitable for THIS specific client); 3. Quantitative Suitability (trading volume is not excessive).
- Churning: Excessive trading primarily to generate broker commissions; violates quantitative suitability.
The 4 Core Obligations of Reg BI
1. Disclosure Obligation (Form CRS and written conflict disclosures); 2. Care Obligation (reasonable diligence, care, and skill); 3. Conflict of Interest Obligation (mitigate or eliminate financial incentives); 4. Compliance Obligation (written supervisory procedures).
Knowledge Checkpoint • Section 12.2
A registered representative recommends frequent purchases and sales of mutual fund shares for a client's account, generating high commissions while incurring significant sales charges. Which suitability standard has the representative violated?