Investment Strategies and Recommendations to Hold
Now that you understand the suitability obligations and Reg BI, a critical question remains: what exactly counts as a "recommendation"? The answer is broader than most candidates expect.
Broad Scope of "Recommendation"
The term "investment strategy involving a security or securities" under Rule 2111 is interpreted broadly. It includes explicit recommendations to:
- Buy a security or securities
- Sell a security or securities
- Hold a security or securities
- Use a particular investment strategy (e.g., a sector rotation strategy, a buy-and-hold approach, a dollar-cost-averaging plan)
The key word is explicit. An explicit recommendation to hold a security triggers the same suitability obligations as a recommendation to buy or sell.
Hold Recommendations
This is one of the most commonly tested concepts in this section:
- An explicit recommendation to hold triggers full suitability analysis
- Telling a customer "just hold what you have" is a recommendation that requires the same analysis as telling them to buy
- However, the rule does not apply to an implicit hold; simply remaining silent about securities held in an account is not a recommendation
| Action | Triggers Suitability? | Why |
|---|---|---|
| "I recommend you buy XYZ stock" | Yes | Explicit buy recommendation |
| "I recommend you sell your ABC position" | Yes | Explicit sell recommendation |
| "I recommend you hold your current positions" | Yes | Explicit hold recommendation |
| Representative says nothing about existing holdings | No | Implicit - no recommendation made |
| Customer initiates an unsolicited trade | No | Customer-initiated, not recommended |
Exam Tip: Gotchas
- "Just hold what you have" IS a recommendation. An explicit hold triggers the same suitability obligations as a buy or sell. Silence about existing holdings (implicit hold) does NOT trigger suitability.
Asset Allocation Model Safe Harbor
Rule 2111.03 provides a safe harbor for recommendations of a generic asset allocation model:
- A recommendation to maintain a generic asset mix (e.g., 60% equity / 40% bonds) may qualify for the safe harbor
- The safe harbor applies only if the firm does not explicitly recommend that the customer hold the specific securities that make up the allocation
- Once the representative recommends specific securities within the allocation, full suitability obligations apply
How the safe harbor works in practice:
| Recommendation | Safe Harbor? |
|---|---|
| "Based on your profile, a 60/40 stock/bond mix is appropriate" | Yes - generic allocation model |
| "You should keep your 60/40 allocation using the Vanguard Total Stock Market fund and iShares Core Bond ETF" | No - specific securities recommended |
| "Maintain your current 60/40 allocation" (customer already holds specific funds) | No - effectively recommending holding specific securities |
Think of it this way: Saying "a 60/40 mix suits your goals" is general guidance. Saying "keep your Vanguard fund and iShares ETF" is recommending specific securities, and full suitability obligations kick in.
Exam Tip: Gotchas
- Naming specific securities kills the safe harbor. A generic asset allocation recommendation (e.g., "60/40 stocks/bonds") qualifies for the safe harbor, but the moment you name specific funds or tell a customer to hold specific positions, full suitability analysis applies.
- "Investment strategy involving a security" is broader than you think. It covers dollar-cost averaging, sector rotation, buy-and-hold approaches, and any strategy tied to securities.