Series 52: 8.4.2.3.6. Suitability Obligations And Churning

8.4.2.3.6.  Suitability Obligations and Churning

Broker-dealers must believe on reasonable grounds that the transactions or strategies they recommend are suitable for each individual customer. Firms may approve an account only after conducting a customer suitability analysis, based on the firm’s due diligence in understanding the risks of the recommendations they make and the customer’s personal and investment profile. They must make “reasonable efforts” when opening an account to collect and maintain this information. The reasonableness test depends on the complexity of the strategy or transaction and the dealer’s prior familiarity with it.

Both the SEC’s Regulation Best Interest and the MSRB’s Rule G-19 specify the following three components of suitability. Rule G-19 applies to institutional customers, whereas Regulation Best Interest applies to retail customers and is discussed in greater detail in the next section.

Reasonable-basis obligation. A broker-dealer must conduct