Suitability

Brokerage firms must have a “reasonable basis” to believe that an investment recommendation or investment strategy is suitable for a customer.  FINRA, the self-regulatory organization that oversees broker-dealers, created FINRA Rule 2111, which formalizes this requirement.  To comply with FINRA Rule 2111, brokerage firms must consider many factors, such as: age, investment time horizon, investment objective and risk tolerance (among others) before they can make an investment recommendation to a customer.  And the recommendation must be in line with those factors.

If a brokerage firm recommends an investment or investment strategy without having “reasonable basis” for doing so, it has violated FINRA Rule 2111 and that violation can give rise to liability.

FINRA created FINRA Rule 2111 to encourage brokerage firms to make investment recommendations that are in the customer’s best interest after considering the relevant, customer-specific factors.