Suitability of Recommendations

FINRA rules require registered representatives to take the following into account before recommending investments to individual investors (non-institutional:

The customer's financial status, tax status, investment objectives and such other information used or considered to be reasonable in making recommendations to the customer.

FINRA rules  require the representative to only make suitable recommendations and to deal fairly with customers. The following practices are examples of violations of the suitability rules:

  • Recommending speculative low-priced securities without attempting to obtain information about the client's financial situation, needs, and other assets
  • Borrowing or using customer's fund or securities
  • Failing to describe important facts and risks about the security to each client
  • Making trades of excessive size in a client's account
  • Churning in a client account (making trades too frequently)
  • Fraudulent activity - making unauthorized transactions in a customers account or setting up fictitious accounts to disguise prohibited activities
  • Recommending trades that are too expensive, too risk or beyond the client's financial ability


Introduction

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