Two customers both check "growth" on the account form. One is 30 with a steady salary. The other is 68 and needs the money next spring. They chose the same label, but they need different recommendations.
A firm has to know who it is dealing with: who may give orders, what instructions apply and when a request looks wrong. Financial Industry Regulatory Authority (FINRA) Rule 2090 is the know-your-customer (KYC) rule. It applies when every account is opened and for as long as the account is maintained. You must use reasonable diligence to know and retain each customer's essential facts. These are the facts you need to service the account, follow special handling instructions, know who may act for the customer and comply with the rules.
Those facts start the investment profile, which is the picture of the customer you test every recommendation against. The Securities and Exchange Commission (SEC) and FINRA list the same core items: age, other investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, risk...
Common mistakes
- Layering suitability on Reg BI: For a retail recommendation, Rule 2111 and G-19 do not apply at all (Rule 2111.08 and Rule G-19 itself).
- Rounding the accredited tests: Both tests say "over," so exactly $1,000,000 or $200,000 fails. The residence never counts, but home debt added within 60 days, other than to buy the home, does.
- Stretching the institutional relief: Rule 2111(b) satisfies only the customer-specific test. Reasonable-basis and quantitative suitability remain.
Bottom line
- Rule 2090: know each customer's essential facts at opening and for the life of the account; get the profile before recommending and keep it current.
- Gather the full financial and personal profile before recommending, and skip a factor only with specific documentation.
- The five objectives are preservation of capital, income, growth, growth and income, and speculation, which uses only risk capital.
- Reg BI protects natural persons using a recommendation for personal, family or household purposes through four obligations: disclosure, care, conflicts of interest and compliance.
Exam shortcut
Start every suitability question by asking who received the recommendation. A natural person using it personally means Reg BI. An entity means Rule 2111 or G-19. A municipal SMMP means G-48(c). Then look for the trap. Any answer that requires control for churning is wrong unless the stem names an SMMP. "Disclose it" is wrong for a time-limited sales contest.
The full lesson (about 3,695 words, 25 min read) adds 2 worked examples, all 4 common mistakes, a self-check, free in the app.
Learning objectives
- B9
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