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👥 Customer Accounts · Lesson 2 of 8 · 5 min

Suitability, Reg BI and Form CRS

⚖️ A recommendation can be legal for one customer and a violation for the next. The difference is the customer, not the product.

💡 Key idea

2111 = reasonable-basis, customer-specific, quantitative. Reg BI = Disclosure, Care, Conflict of interest, Compliance, and it governs recommendations to retail customers.

🧠 Why it matters

FINRA Rule 2111 has three obligations (mnemonic R-C-Q). REASONABLE-BASIS: the product is suitable for at least some investors. CUSTOMER-SPECIFIC: it fits THIS customer's profile (age, income, objectives, risk tolerance, time horizon, liquidity needs). QUANTITATIVE: a series of trades is not excessive taken together. For recommendations to RETAIL customers (natural persons investing for personal or household purposes), the SEC's Regulation Best Interest applies instead, in effect since June 30, 2020. Its four obligations: Disclosure, Care, Conflict of interest, Compliance (one D and three C's). Form CRS, a relationship summary of up to two pages for a broker-dealer, goes to a retail investor at or before the earliest of a recommendation, an order, or opening an account.

📈 In the real world

📋 Sam, a fictional 78-year-old retiree, needs steady income and cash for medical bills. His rep likes a volatile, illiquid product that pays a high commission. The product may suit some investors (reasonable basis passes), but not Sam: it fails the care analysis and puts the rep's pay ahead of Sam's interest.

📌 Takeaways

  • Suitability: Reasonable-basis, Customer-specific, Quantitative (R-C-Q)
  • Reg BI's four: Disclosure, Care, Conflict of interest, Compliance
  • Form CRS: at or before the first recommendation, order or account opening

📖 Terms in this lesson

Suitability (Rule 2111): FINRA's rule that recommendations be suitable, with reasonable-basis, customer-specific and quantitative obligations.

Regulation Best Interest: The SEC rule requiring broker-dealers to act in a retail customer's best interest when recommending, without putting their own interests first.

Form CRS: A short SEC-required relationship summary for retail investors covering services, fees, conflicts and disciplinary history.

✅ Test yourself

Which suitability obligation concerns whether a series of trades is excessive?
  1. Know your customer
  2. Reasonable-basis
  3. Quantitative
  4. Customer-specific

Answer: C · Quantitative

Quantitative suitability looks at the frequency and pattern of trades taken together. Reasonable-basis is about the product; customer-specific is about the fit; KYC is Rule 2090.

Which is NOT one of the four component obligations of Regulation Best Interest?
  1. Disclosure obligation
  2. Monitoring obligation
  3. Compliance obligation
  4. Care obligation

Answer: B · Monitoring obligation

Reg BI has Disclosure, Care, Conflict of interest and Compliance obligations. The SEC said Reg BI does not create a duty to monitor accounts unless the firm agrees to monitor.

When must a broker-dealer deliver Form CRS to a new retail investor?
  1. Within 30 days after the account is opened
  2. At or before the first recommendation, order or account opening
  3. With the first quarterly account statement
  4. Only if the customer asks for a copy

Answer: B · At or before the first recommendation, order or account opening

Form CRS goes out at or before the earliest of a recommendation, placing an order, or opening an account. Delivering it later, or only on request, misses its purpose of informing the choice up front.

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