Introduction

Welcome to Recommendations and Disclosures: the rules that govern how a broker-dealer (BD) gathers customer profile information, makes recommendations, prices transactions, and delivers required notices to retail and institutional customers. This unit is the conduct-of-the-recommendation core of Function 3 on the Series 24 exam.

Exam Weight: Part of 21% (~32 questions across Function 3)

What You'll Learn

In this unit, you'll cover:

• Know Your Customer and Suitability: How the know-your-customer rule requires reasonable diligence to know the essential facts about every account, how the suitability rule layers on three suitability obligations (reasonable-basis, customer-specific, quantitative), and the institutional-customer exemption that drops customer-specific suitability when the institutional customer affirms in writing it is exercising independent judgment
• Regulation Best Interest: The best-interest standard that applies when a broker-dealer recommends a securities transaction or investment strategy to a retail customer, with its four component obligations (Disclosure, Care, Conflict of Interest, Compliance), and how Reg BI sits above suitability for retail recommendations
• Form CRS: The Customer Relationship Summary every BD that serves retail investors must prepare, file electronically with the SEC, and deliver before or at the earliest of recommending an account type, placing an order, or opening a brokerage account
• Markups, Markdowns, and Commissions: The 5% policy as a guideline (not a safe harbor), miscellaneous service charges, net-transaction consent rules for non-institutional and institutional customers, and the same-day-offsetting-trade markup disclosure for retail debt confirmations
• Discretionary Accounts: The three required writings (customer authorization, principal acceptance, principal approval of each order), the periodic supervisory review, and the federal anti-fraud backstop for excessive discretionary trading
• Day-Trading Rules: The risk-disclosure statement for non-institutional accounts, the good-faith-determination or written-non-day-trading-agreement approval procedure, and the pattern day trader (PDT) $25,000 minimum equity rule
• Breakpoint Sales: The prohibition on selling fund shares just below a breakpoint to capture higher sales charges, and the supervisory duty to detect rights of accumulation, letters of intent, and combined-purchase eligibility
• Customer Disclosures: The disclosure inventory delivered at account opening or annually (proxy forwarding, margin, extended-hours trading, SIPC, BrokerCheck, predispute arbitration)
• Other Account-Activity Controls: Payments to unregistered persons, holding customer mail, written authorization for negotiable instruments, and the OTC equity recommendation review
• Red-Flag Recognition: The principal's duty to recognize, investigate, and escalate patterns suggesting churning, exploitation of vulnerable customers, missing disclosures, and unauthorized activity, including use of the Trusted Contact Person and temporary holds for senior or vulnerable investors

Why This Matters

The Series 24 exam tests three principal-level questions on this material:

• Whether the firm gathered the right profile information under know-your-customer requirements and applied the right standard (Reg BI for retail customers; suitability for institutional and non-retail) before any recommendation
• Whether the firm priced the trade fairly under the markup/commission fairness rule, obtained the right consents for net transactions, delivered the right disclosures (Form CRS, markup/markdown on retail debt, breakpoint discounts, and the annual disclosure stack), and approved discretion only with the three required writings
• Whether the firm recognized red flags in customer activity, investigated and documented the supervisory response, and escalated through the Trusted Contact Person, temporary holds, SARs, or account restrictions where appropriate

A firm that recommends a complex retail product without considering lower-cost alternatives violates Reg BI's care obligation; a firm that allows a rep to enter discretionary orders on oral authorization violates the discretionary-account rule; a firm that sells $98,000 of a fund where the next breakpoint sits at $100,000 violates the breakpoint-sales prohibition. The exam pairs these because the rulebook does.

Let's start with the foundational fact-gathering and recommendation rules that drive every other decision in this unit: Know Your Customer and Suitability.