SuitABiLity enforcement roAred BAck in 2015,
according to washington, d.c., law firm Sutherland Asbill
& Brennan LLp. According to its annual survey of finrA
enforcement actions, the organization reported 76 suitability
cases in 2015, resulting in $18.3 million in fines.
in addition to significant fines, finrA also imposed $28 million in restitution, a 1,117 percent increase from
$2.3 million in 2014. given the apparent increase in finrA scrutiny of suitability issues, the national ethics
Association and its e&o insurance affiliate, eoforLess, recommend all securities-licensed advisors redouble their
efforts to recommend only securities that are consistent with customer
needs and risk profiles.
neA and eoforLess also suggest reviewing the basics of suitability in
order to prevent unforced errors. to this end, it’s important for advisors to
know that finrA has mandated three types of suitability requirements:
reasonable basis, customer specific and quantitative.
reasonable-basis suitability means brokers must first understand the
products they sell before recommending them to clients. what’s more, not
understanding a product can still create compliance problems even if the
recommendation in and of itself is suitable.
customer-specific suitability means a broker must make only recommendations that are consistent with the customer’s “investment profile.” to
determine that profile, the broker must conduct a comprehensive fact-finder.
According to the robins kaplan law firm, brokers must use reasonable
diligence to secure this information (i.e., they must ask for it). But further
efforts may be required if the person supplies inaccurate answers or shows
Quantitative suitability means the broker must have a reasonable basis
to believe the number of securities transactions they make for a client is not
excessive given the person’s profile. under this suitability type, a securities
purchase might be suitable in and of itself, but not suitable if repeated 10,
50 or 100 times.
finally, finrA rule 2111 requires brokers to always act in the best interests of a client, recommending “client-first” solutions rather than those that
boost their own commissions or help their firms serve other agendas.
for more information, the national ethics Association and eoforLess
recommend that advisors review their broker-dealer suitability guidelines.
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red fLAg reminder
BY NATIONAL ETHICS ASSOCIATION
Watch out for FINRA suitability