The Suitability Framework

Once the customer profile is on file, the FINRA suitability rule governs whether a given recommendation is allowed. It is the core Series 6 suitability standard, and it sits at the center of Function 2.3.

What does the suitability rule require for recommendations?

A member or associated person (AP) 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 reasonable diligence to ascertain the customer's investment profile.

Three points matter for the exam:

• The suitability rule is triggered by a recommendation. It does not apply to every customer interaction. (Contrast: the know-your-customer (KYC) rule applies whether or not a recommendation is made.)
• A recommendation can be to buy, sell, hold, or adopt an investment strategy involving securities.
• The rule applies to the firm (the member) and to the associated person making the recommendation.

Exam Tip: Gotchas

• Suitability requires a RECOMMENDATION. A customer who walks in, names a fund, and places an order with no advice has not triggered the suitability rule. The rep still owes KYC under the know-your-customer rule and must document the unsolicited nature of the order.

What are the three suitability obligations?

The suitability rule has three cumulative obligations. A recommendation must pass all three, not just one.

Think of it this way: Reasonable-basis is "Is this product OK for anyone?" Customer-specific is "Is this product OK for this person?" Quantitative is "Even if each trade is OK, are we doing too many of them?" All three must say yes.

Exam Tip: Gotchas

• The three suitability obligations are cumulative, not alternative. A recommendation that passes reasonable-basis but fails customer-specific (bad match for the customer's profile) is still unsuitable. A recommendation that passes customer-specific but fails quantitative (too many trades in the account) is still unsuitable.

How is each suitability obligation satisfied?

The suitability rule's commentary breaks down the components of each obligation.

Reasonable-Basis

• Requires reasonable diligence to understand the product
• Review of the prospectus, knowledge of fees, risks, tax treatment, payouts, liquidity
• The firm must understand the product before adding it to the selling agreement

Customer-Specific

• Requires a reasonable basis to believe the recommendation is suitable for the specific customer based on the investment-profile factors
• The analysis is forward-looking at the time of the recommendation, not a guarantee of investment performance

Quantitative

• Applies only where the member or AP has actual or de facto control over the customer's account
• Actual control: discretionary authority
• De facto control: the customer routinely follows the rep's recommendations without independent evaluation
• Without control, the customer is directing the activity, and the series-of-transactions analysis does not apply in the same way

Exam Tip: Gotchas

• Quantitative suitability requires CONTROL over the account. A customer who independently evaluates each recommendation and sometimes says no is driving the bus. A customer who rubber-stamps every recommendation has given the rep de facto control, and the quantitative obligation attaches. This is the classic churning context.

When does the reasonable-basis suitability obligation attach?

Reasonable-basis suitability can be established before any customer is identified. It is a duty to understand the product.

• A firm that adds a new mutual fund to its selling agreement without first understanding the fund's risks has violated the reasonable-basis obligation
• This is true even before the first recommendation is made
• Series 6 reps recommending variable annuities, mutual funds, and 529 plans rely on the firm's reasonable-basis diligence

Think of it this way: Reasonable-basis is the firm's product-review desk. Customer-specific is the rep's recommendation to a particular customer. Quantitative is the supervisor's look at the account over time. Three different eyes on three different questions.

Exam Tip: Gotchas

• Reasonable-basis suitability can exist with no customer in view. A firm that lets a rep recommend a product the firm has not diligenced has failed reasonable-basis, regardless of whether that customer turns out to be a perfect match for the product.

What are the customer profile factors used for suitability?

Every customer-specific analysis runs through the investment-profile factors listed in the suitability rule:

• Age
• Other investments
• Financial situation and needs
• Tax status
• Investment objectives
• Investment experience
• Investment time horizon
• Liquidity needs
• Risk tolerance
• Any other information the customer discloses

Missing information from this list narrows what the rep can recommend. The rep may still place unsolicited trades the customer directs.

What are the most tested suitability concepts?

Exam Tip: Gotchas

• Recommendation (not just account opening or a routine conversation) triggers the suitability rule.
• Three cumulative obligations: reasonable-basis, customer-specific, quantitative. All three apply.
• Quantitative requires CONTROL of the account (actual or de facto). Without control, the analysis shifts.
• Reasonable-basis can attach BEFORE any customer exists. It is a product-understanding duty.
• The investment-profile factor list is the governing list for customer-specific suitability.