Suitability & Regulation Best Interest Attorneys — Bakhtiari & Harrison

The suitability obligation — FINRA Rule 2111 and Regulation Best Interest

Every FINRA-registered broker has an obligation to recommend only investments that are suitable for the specific investor receiving the recommendation. This obligation is governed by two overlapping legal standards:

• FINRA Rule 2111 (Suitability): requires brokers to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer based on the customer’s investment profile — including age, financial situation, tax status, investment objectives, risk tolerance, time horizon, liquidity needs, and other customer-specific factors.
• Regulation Best Interest (Reg BI): effective June 2020, Reg BI requires broker-dealers to act in the best interest of retail customers when making a recommendation, and prohibits placing the firm’s or broker’s financial interests ahead of the customer’s interests. Reg BI imposes four component obligations: disclosure, care, conflict of interest, and compliance.

Suitability violations are the most common category of investor claim in FINRA arbitration — and one of the most straightforward to prove when the investor’s account opening documents and the recommended investments tell contradictory stories.

Three dimensions of suitability

• Reasonable basis suitability: the broker must have a reasonable basis to believe the recommendation is suitable for at least some investors before making it. A broker who recommends a product without adequate research into the product’s risks and characteristics violates reasonable basis suitability.
• Customer-specific suitability: the broker must have a reasonable basis to believe the recommendation is suitable for the specific investor based on that investor’s profile. A product that is suitable for a 35-year-old aggressive growth investor may be completely unsuitable for a 70-year-old conservative retiree.
• Quantitative suitability: a broker with actual or de facto control over an account must not make excessive trades — even if each individual trade was suitable — when the overall pattern of trading is inconsistent with the investor’s objectives and financial situation.

Common suitability violations

• Recommending high-risk speculative investments to conservative or elderly investors
• Recommending long-surrender-period variable annuities to investors who need liquidity
• Recommending illiquid private placements or non-traded REITs to investors who need accessible funds
• Overconcentrating a portfolio in a single security, sector, or product
• Recommending complex leveraged or inverse products to investors who do not understand them
• Recommending margin strategies to investors whose risk tolerance cannot accommodate leverage
• Failing to account for the investor’s tax situation, time horizon, or liquidity needs

Proving a suitability claim in FINRA arbitration

Proving a suitability violation requires establishing: (1) the investor’s actual financial profile at the time of the recommendation, (2) the risk characteristics of the recommended investment, and (3) the inconsistency between the two. Key evidence includes account opening documents and suitability questionnaires, correspondence between the broker and investor, marketing materials for the recommended product, and expert testimony on FINRA suitability standards and whether the recommendation met them.

Ryan Bakhtiari’s service as FINRA NAMC Chairman — including his work on the committee implementing FINRA’s suitability and Regulation Best Interest rules — gives the firm direct institutional knowledge of how these standards were intended to be applied and how panels evaluate them.

Frequently asked questions — suitability

What makes an investment recommendation “unsuitable”?

A recommendation is unsuitable when it is inconsistent with the investor’s investment profile — age, risk tolerance, financial situation, investment objectives, time horizon, and liquidity needs. The analysis is specific to the individual investor, not to the investment product in isolation. A high-risk product is not unsuitable per se — it is unsuitable for an investor whose profile cannot accommodate that risk.

Can I have a suitability claim even if I signed a document saying I understood the risks?

Yes. Disclosure documents and risk acknowledgment forms are relevant but do not automatically eliminate a suitability claim. If the actual risk of the investment exceeded what was disclosed, or if the investor’s profile made the investment unsuitable regardless of the disclosure, the claim survives. Bakhtiari & Harrison has successfully pursued suitability claims in FINRA arbitration notwithstanding investor-signed disclosure documents.

What is Regulation Best Interest and how does it differ from suitability?

Regulation Best Interest, effective June 2020, requires brokers to act in the retail customer’s best interest — a higher standard than the prior suitability standard. Reg BI prohibits brokers from placing their own financial interests ahead of the customer’s, even if the recommendation is technically suitable. It also imposes new conflict of interest disclosure requirements. Violations of Reg BI are actionable in FINRA arbitration for recommendations made on or after June 30, 2020.

For a full overview of the firm’s investor representation practice, visit the Advisor Misconduct page.

Contact a suitability attorney — free consultation

Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys review every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.

Investor cases are handled on a contingency fee basis — no recovery, no fee.

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