FINRA Rule 2111 (Suitability)
FINRA Rule 2111, also known as FINRA’s suitability rule, essentially requires broker-dealers to only recommend suitable investments to their customers. FINRA Rule 2111 is one of the most common claims asserted in FINRA arbitrations and, according to statistical data from FINRA, it consistently ranks as one of the top claims asserted in every customer arbitration. Despite being commonly asserted, FINRA Rule 2111 is often misunderstood because it is far more complex than it may seem at first blush.
Nearly every FINRA arbitration that our law firm handles will involve a suitability claim under FINRA Rule 2111. At its core, FINRA Rule 2111 contains three basic broker-dealer obligations: (i) reasonable basis suitability; (ii) customer-specific suitability; and (iii) quantitative suitability. For every transaction, or series of transactions, that a broker-dealer recommends it must comply with all three basic prongs of FINRA Rule 2111.
If you or someone you know believes that you were recommended unsuitable investments in violation of FINRA Rule 2111, feel free to contact us for a free and confidential consultation.
What is Reasonable Basis Suitability Under FINRA Rule 2111?
Reasonable basis suitability means that a broker-dealer must perform reasonable due diligence in order to understand the nature of the investment or strategy. The goal for reasonable basis suitability is to determine if a particular investment is suitable for sale, generally, to the public at large. The key aspect of this rule is the performance by the broker-dealer of reasonable due diligence, which is required for every investment recommended by a financial advisor.
What is Customer Specific Suitability Under FINRA Rule 2111?
The second basic aspect of FINRA Rule 2111 is customer-specific suitability. The goal of customer-specific suitability is to determine that an investment is suitable for a specific customer based on that individual customer’s age, risk tolerance, liquidity needs and other factors.
What is Quantitative Suitability Under FINRA Rule 2111?
Finally, quantitative suitability requires a broker-dealer to have a reasonable basis to believe that a series of transactions, when taken together, are suitable. This aspect of the rule is most often implicated in churning cases.
Can a Customer Waive Their Rights Under FINRA Rule 2111?
Absolutely not. FINRA Rules as well as federal and most state blue sky laws, contain what is known as “anti-waiver” provisions. These provisions make void any agreements, which purport to waive compliance with any FINRA Rules, the Securities and Exchange Act and State Blue Sky Laws.
What Exactly Does FIRNA Rule 2111 Say?
FINRA Rule 211
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A 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, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
(b) A member or associated person fulfills the customer-specific suitability obligation for an institutional account, as defined in Rule 4512(c), if (1) the member or associated person has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating the member’s or associated person’s recommendations. Where an institutional customer has delegated decision making authority to an agent, such as an investment adviser or a bank trust department, these factors shall be applied to the agent.
Amended by SR-FINRA-2014-016 eff. May 1, 2014.
Amended by SR-FINRA-2013-001 eff. Feb. 4, 2013.
Adopted by SR-FINRA-2010-039 and amended by SR-FINRA-2011-016 and SR-FINRA-2012-027 eff. July 9, 2012.
Where Can I Read More About FINRA Rule 2111?
In addition to the FINRA Rule 2111, itself, FINRA routinely publishes guidance on these rules. The most comprehensive guidance was released by FINRA in 2012 following a major update to the rule. That guidance can be found here and here.