FINRA Rule 2111, titled "Suitability," is a critical regulation governing recommendations made by broker-dealers and their associated persons like registered advisors. It aims to protect investors by ensuring recommended investments align with their unique financial circumstances and investment objectives.
Here's a breakdown of the rule's key aspects:
Core Principle: A member firm or associated person must have a reasonable basis to believe that any recommended transaction or investment strategy involving securities is suitable for the customer.
Determining Suitability: This requires reasonable diligence to collect and assess information about the customer's investment profile, including:
Investment objectives: What are their financial goals and desired timeframes?
Investment experience: Are they new or seasoned investors?
Risk tolerance: How comfortable are they with potential losses?
Financial situation: What are their income, assets, and liabilities?
Liquidity needs: How easily do they need access to their invested funds?
Investment time horizon: When do they plan to access the invested funds?
Beyond Information Gathering:
The recommended investment's risk and complexity must be considered in relation to the customer's profile.
The firm's understanding of the investment's potential risks and rewards is crucial.
The recommendation should not solely be based on generating commissions for the firm or associated person.
Customer Financial Ability: The rule also prohibits recommending investments or strategies exceeding the customer's financial ability to meet the commitment.
Additional Information:
Rule 2111 doesn't apply to recommendations under SEC Regulation Best Interest (Reg BI).
FINRA provides FAQs and resources for further understanding the rule's interpretations and applications.
Significance: FINRA Rule 2111 plays a vital role in safeguarding investors by ensuring recommendations are aligned with their individual circumstances and protecting them from unsuitable investments. Understanding this rule empowers investors to ask informed questions and hold their financial advisors accountable for fulfilling its requirements.