FINRA Rules Regarding Suitability

Securities Fraud Attorneys | Suitability Claims

One of the main claims in any securities fraud case is regarding suitability (i.e., were the investments recommended to the customer appropriate considering the customer’s age, investment experience, investment objectives, etc.?). The following is a brief breakdown of the FINRA Rules applicable to suitability. 

FINRA Rule 2111 Suitability 

Rule 2111 adopts past SEC and FINRA guidance by applying suitability obligations not only to recommended securities transactions, but also to recommended investment strategies involving a security or securities. The rule hinges a suitability obligation on whether a broker-dealer or associated person makes a recommendation. A firm must determine the suitability of the investment for the customer based on all information (not just the required data) that is known to the firm or associated person.  

Firms that fail to perform adequate due diligence, or that make unsuitable recommendations, can be held responsible for losses in a Financial Industry Regulatory Authority (FINRA) arbitration claim. 

FINRA rule 2111 codifies three separate suitability obligations: 

(1) Reasonable Basis – firms must have a reasonable basis to believe, based on adequate due diligence, that a recommendation is suitable at least for some investors; 

(2) Customer Specific – firms must have reasonable grounds to believe a recommendation is suitable for the specific investor;  

(3) Quantitative – firms must have a reasonable basis to believe the number of recommended transactions within a certain period is not excessive (i.e., that the investor’s account is not being churned). 

Churning or Excessive Trading 

Rule 2111 also touches on the concept of churning (or excessive trading).  According to the Rule, for the doctrine of churning to apply, it requires that a registered representative have actual or de facto control over a client’s account. Additionally, the churning interpretation provides that, even if individual transactions for such an account may appear suitably viewed in isolation, a series of such transactions must not be excessive and unsuitable in view of the customer’s profile. The interpretative material indicates that no single factor is dispositive with respect to excessiveness, but states that turnover rate, cost-equity ratio and use of in-and-out trading all may be probative factors. To learn more about churning, see: Is your Financial Advisor Churning your Account? 

FINRA Rule 2090 – Know-Your-Customer 

The suitability analysis also requires a duty of the financial advisor to “know its customer.” FINRA Rule 2090 requires firms to know and retain the “essential facts” about every customer and concerning the authority of any person acting on behalf of the customer. “Essential facts” for these purposes include the customer’s financial profile and investment objectives or policy. 

FINRA Rule 2111 and FINRA Rule 2090 requires a broker-dealer or associated person to make reasonable efforts to understand their client’s goals and to create an investment profile that includes the following: 

• age 
• investment experience 
• retirement goals 
• investment time horizon 
• liquidity needs 
• risk tolerance 
• financial situation (now and in the future) 

National Securities Attorneys  

The foregoing information, which is all publicly available on FINRA’s website, is being provided by The White Law Group.   

If you believe that you have a viable FINRA suitability claim and would like to speak with a national FINRA arbitration attorney regarding your recovery options, please call the White Law Group at 888-637-5510 for a free consultation.   

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to the representation of investors in FINRA arbitration claims against brokerage firms throughout the United States.  

The White Law Group’s FINRA arbitration attorneys have handled over 700 FINRA arbitration claims involving unauthorized trading, unsuitable investments, fraud, negligence, churning/excessive trading, and improper use of margin.