Suitability rule states that firms and their associated persons “must have a reasonable basis to believe” that a transaction or investment strategy involving securities that they recommend is suitable for the customer. This reasonable belief must be based on the information obtained through the reasonable diligence of the firm or associated person to ascertain the customer’s investment profile. If an investor were to suffer a significant loss in a specific holding, the outcome of the dispute might hinge on whether it was viewed in the context of a single account or on a multi-account basis. The rule requires firms and associated persons to seek to obtain information about the customers –
- age;
- other investments;
- other financial situation and needs, which might include questions about annual income and liquid net worth;
- tax status, such as marginal tax rate;
- investment objectives, which might include generating income, funding retirement, buying a home, preserving wealth or market speculation;
- investment experience;
- investment time horizon, such as the expected time available to achieve a particular financial goal;
- liquidity needs, which is the customer’s need to convert investments to cash without incurring a significant loss of value; and,
- risk tolerance, which is a customer’s willingness to risk losing some or all of the original investment in exchange for greater potential returns.
