Suitability

Suitability obligations are critical to ensuring investor protection and promoting fair dealings with customers and ethical sales practices. FINRA Rule 2111 governs general suitability obligations, while certain securities are covered under other rules that may contain additional requirements. FINRA Rule 2111 does not apply to recommendations subject to SEA Rule 15l-1 (Regulation Best Interest). Please see the topic page on SEC Regulation Best Interest for information on Reg BI.

FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.

The rule states that the customer’s investment profile “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs [and] risk tolerance,” among other information. A broker’s “recommendation,” which is based on the facts and circumstances of a particular case, is the triggering event for application of the rule.

Brokers must have a firm understanding of both the product and the customer, according to Rule 2111. The lack of such an understanding itself violates the suitability rule.

Suitability Obligations

Rule 2111 lists the three main suitability obligations for firms and associated persons.

  • Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.  Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.
  • Customer-specific suitability requires that a broker, based on a particular customer’s investment profile, has a reasonable basis to believe that the recommendation is suitable for that customer. The broker must attempt to obtain and analyze a broad array of customer-specific factors to support this determination.
  • Quantitative suitability requires a broker with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.

Contact OGC

FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see Interpreting the Rules for more information.

OGC staff contacts:
Jim Wrona and Meredith Cordisco
FINRA, OGC
1700 K Street, NW
Washington, DC 20006
(202) 728-8000
 

  • Regulatory Notice 20-18
    FINRA Amends Its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest
    06/19/2020
  • Regulatory Notice 20-14
    Sales Practice Obligations With Respect to Oil-Linked Exchange-Traded Products
    05/15/2020
  • Regulatory Notice 18-13
    FINRA Requests Comment on Proposed Amendments to the Quantitative Suitability Obligation Under FINRA Rule 2111
    04/20/2018
  • Regulatory Notice 15-32
    FINRA Filing Requirements and Review of Regulation A Offerings
    09/08/2015
  • Regulatory Notice 13-31
    FINRA Highlights Examination Approaches, Common Findings and Effective Practices for Complying With its Suitability Rule
    09/25/2013
  • Regulatory Notice 12-55
    Guidance on FINRA's Suitability Rule
    12/10/2012
  • Regulatory Notice 12-25
    Additional Guidance on FINRA's New Suitability Rule
    05/18/2012
  • Regulatory Notice 11-39
    Guidance on Social Networking Websites and Business Communications
    08/18/2011
  • Regulatory Notice 11-25
    New Implementation Date for and Additional Guidance on the Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
    05/18/2011
  • Regulatory Notice 11-02
    SEC Approves Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations
    01/10/2011
  • Regulatory Notice 10-22
    Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings
    04/20/2010
  • Regulatory Notice 07-43
    FINRA Reminds Firms of Their Obligations Relating to Senior Investors and Highlights Industry Practices to Serve these Customers
    09/10/2007
  • Notice to Members 06-38
    Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties
    08/09/2006
  • Notice to Members 05-26
    NASD Recommends Best Practices for Reviewing New Products
    04/06/2005
  • Notice to Members 05-18
    NASD Issues Guidance on Section 1031 Tax-Deferred Exchanges of Real Property for Certain Tenants-in-Common Interests in Real Property Offerings
    03/02/2005
  • Notice to Members 04-89
    NASD Alerts Members to Concerns When Recommending or Facilitating Investments of Liquefied Home Equity
    12/08/2004
  • Notice to Members 04-30
    NASD Reminds Firms of Sales Practice Obligations In Sale of Bonds and Bond Funds
    04/13/2004
  • Notice to Members 03-07
    NASD Reminds Members of Obligations When Selling Hedge Funds
    01/23/2003
  • Notice to Members 01-23
    Suitability Rule And Online Communications
    03/18/2001
  • Notice to Members 96-60
    Clarification Of Members' Suitability Responsibilities Under NASD Rules With Special Emphasis On Member Activities In Speculative And Low-Priced Securities
    09/01/1996
  • Notice to Members 96-32
    Members Reminded To Use Best Practices When Dealing In Speculative Securities
    05/01/1996
  • FAQ
    FINRA Rule 2111 (Suitability) FAQ
    The following frequently asked questions (FAQs) provide guidance on FINRA Rule 2111 (Suitability). This document consolidates the questions and answers in Regulatory Notices 12-55, 12-25 and 11-25, organized by topic.
  • Targeted Examination Letter
    Targeted Examination Letter on VIX-Linked Product Review
    FINRA’s Member Regulation department is conducting a review with respect to products linked to the CBOE’s Volatility Index (VIX). The review will focus on the supervisory processes followed by firms to identify and mitigate sales practice risks associated with recommendations to non-institutional purchasers of VIX-linked products.
    April 09, 2018
  • Interpretive Letter
    Interpretive Letter to Brian Sweeney, Trustmont Financial Group, Inc.
    Request for Interpretive Guidance on FINRA Rule 2111 (Suitability) in Relation to EB-5 Program Securities Transactions
    August 26, 2013
  • Interpretive Letter
    Interpretive Letter to Name Not Public
    Staff clarification of NASD Notice to Members 96-60 regarding a member's suitability obligation under NASD Rule 2310 with respect to certain investment company transactions.
    March 04, 1997
  • Interpretive Letter
    Interpretive Letter to Stuart J. Kaswell, SIA
    Staff clarification of NASD Notice to Members 96-60 regarding a member's suitability obligation under NASD Rule 2310.
    January 23, 1997
  • Investor Insights
    Investor Alert: Customer Advisory Centers—What Investors Need to Know
    A brokerage firm customer advisory center is staffed by securities professionals who might provide financial planning services, sell securities products, and receive commissions or other financial incentives for doing so. These centers can be sales-oriented and often mean customers no longer work with a single broker.