Suitability Rule

The Suitability Rule requires financial professionals, such as brokers, to recommend investment products that are appropriate for their clients' “investment profile,” which comprises the clients’ age, investment portfolio, tax status, liquidity needs, among other considerations. While each investment profile factor can vary in significance depending on the particular client, the Suitability Rule requires regulated individuals to exercise reasonable diligence in ascertaining clients’ investment profile.

Regulated individuals satisfy the Suitability Rule for institutional accounts, defined as the account of a bank, savings and loan association, insurance company, registered investment company, registered investment adviser or any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million, if:

  1. The regulated individual reasonably believes that the institutional client can independently evaluate investment risks, both generally and with regard to particular transactions and investment strategies, and
  2. The institutional client affirms that it is independently evaluating the regulated individual’s recommendations. 

By understanding these factors, brokers can make informed recommendations that are generally consistent with the interests of their clients. The Suitability Rule is enforced by regulatory bodies such as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) to promote ethical practices and protect investors from unsuitable investment advice.

For more information, see: FINRA Rule 2111 - Suitability, and FINRA Guidance - Suitability

[Written in December of 2024 by the Cornell Law School Securities Law Clinic]

Wex