Customer Investment Profiles and Suitability

The whole unit on one sheet: which standard applies to whom, the three suitability layers, Reg BI's four obligations, and the numbers the exam loves.

Which Rule Applies (Start Here)

• KYC rule: always on, every account, whether or not a recommendation is made. Gathers essential facts to service the account, follow special-handling instructions, know each person's authority, and comply with the rules.
• FINRA suitability rule: triggered by a recommendation; governs non-retail (institutional) recommendations.
• Reg BI: triggered by a recommendation to a retail customer (a natural person, or non-professional legal rep of one, using it primarily for personal, family, or household purposes). Absorbs and exceeds suitability.
• A recommendation can be to buy, sell, hold, or adopt a strategy involving securities.

The Three Suitability Obligations (Cumulative)

• Reasonable-basis: understand the product. Can attach before any customer exists. Is it OK for at least some investors?
• Customer-specific: match to this customer's investment profile.
• Quantitative: the series of trades is not excessive. Only applies where the rep has actual or de facto control of the account (the churning context).
• All three must pass, not just one.

Reg BI's Four Obligations

• Disclosure: full and fair written disclosure before or at the time of the recommendation (relationship, fees, conflicts; identify BD status).
• Care: mirrors the three suitability layers, but the standard is best interest, not merely suitable.
• Conflict of Interest: identify conflicts, then disclose, mitigate, or eliminate.
• Compliance: written policies and procedures to achieve overall Reg BI compliance.
• All four required; complying with some but not all is not a safe harbor.

The One-Liners That Win Points

• KYC always; suitability only on a recommendation; Reg BI only for retail.
• "Hold" is a recommendation. "Stay in that fund" triggers suitability under the customer's current profile, not the profile at purchase.
• A strategy is a recommendation even with no specific security named (dollar-cost averaging, laddering, sector rotation).
• Reg BI is "at the time of the recommendation," not a continuous fiduciary duty. The Investment Advisers Act imposes the ongoing fiduciary standard.
• Sales contests, quotas, and non-cash comp tied to specific securities in a limited period must be ELIMINATED, not just disclosed.
• Retail investor (Form CRS) is broader than retail customer (Reg BI): a prospect who has not yet received a recommendation still gets Form CRS.
• A $50 million natural person can qualify as an institutional account.
• Negative consent is never affirmation: silence does not waive customer-specific suitability.

Numbers to Lock In

The Nine Profile Factors

Age; other investments; financial situation and needs; tax status; investment objectives; investment experience; investment time horizon; liquidity needs; risk tolerance; plus any other information the customer discloses. Risk tolerance and time horizon are the two candidates most often drop, and both are required.

The Institutional-Customer Exemption

• Waives customer-specific suitability only. Reasonable-basis always applies; quantitative still applies where control exists.
• All three conditions: institutional-account status (listed entity or $50 million in assets), a reasonable belief the customer can evaluate risk independently, and the customer's affirmative indication of independent judgment.
• Reg BI does not cover institutional customers: they stay under the FINRA suitability rule.

Municipal and Tool Overlays

• MSRB municipal-suitability rule: the muni parallel to the FINRA suitability rule, covering 529 plans, Local Government Investment Pools (LGIPs), and ABLE accounts. Same three obligations. Tax status is outcome-determinative (recommending tax-exempt munis to a low-bracket customer is a classic red flag). For retail customers, Reg BI compliance satisfies it.
• Investment-analysis-tool rule: governs interactive tools that simulate outcomes. Requires written disclosure of methodology, limitations, assumptions, universe of investments, and revenue bias. Additive to the suitability rules, not a substitute.

Top Gotchas

• The three suitability obligations are cumulative, not alternative. Passing reasonable-basis but failing customer-specific is still unsuitable.
• A customer's refusal to share does not close the account: it stops recommendations. The firm may still open the account and take unsolicited orders; document the refusal.
• Reg BI applies to retail only. A corporate pension plan, bank treasury desk, or hedge fund gets the FINRA suitability rule, not Reg BI.
• A rollover recommendation triggers Form CRS on its own, even if no new account is opened.
• The investment-analysis-tool clock starts at first use, not first design or first internal test, and requires both FINRA access and template filing.
• The rules stack. A retail customer buying a 529 plan with a Monte Carlo tool activates Reg BI, Form CRS, the MSRB municipal-suitability rule, and the investment-analysis-tool rule at once.

One-Breath Recap

Ask two questions: was a recommendation made, and who is the customer. No recommendation means KYC only; a recommendation to a retail natural person means Reg BI (four obligations) plus Form CRS, while an institutional recommendation stays under the FINRA suitability rule with its three cumulative layers. Remember hold is a recommendation, sales contests get eliminated, and the muni and tool rules stack on top.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Customer Investment Profiles and Suitability unit for the complete lesson.