2.4. Suitability Obligations

FINRA rules require that in most cases you must establish the suitability of an investment for a customer before you recommend the investment to the customer. Suitability is the appropriateness of an investment to the investor’s financial situation and goals. FINRA rules break down suitability into three specific obligations. These are:

Reasonable-basis. The reasonable-basis suitability obligation requires a firm recommending an investment to understand its complexity and risks, and consciously determine whether it is suitable for at least some investors. If a member firm or its brokers and dealers do not understand the risks and mechanics of mortgage-backed securities, for example, it is a suitability violation to recommend them to investors.

Customer-specific. In order to fulfill its customer-specific suitability obligation, a firm must have a reasonable basis to believe t