Suitability rules

Suitability rules

Policies and guidelines that brokers must use to ensure that investors have the financial means to assume risks that they wish to undertake. These are enforced by the NASD and other self-regulatory organizations.

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Suitability rules

A stated or implied requirement by a regulatory body that a broker or investment adviser must reasonably believe that a certain investment decision will benefit a client before making a recommendation to him/her. That is, the broker or investment adviser must act in good faith, and may not knowingly recommend bad investments. Different regulators and self-regulating organizations incorporate suitable rules in different places in their bylaws. Two commonly referenced suitability rules are Rule 2310 for the Financial Industry Regulatory Authority and Rule 405 for the NYSE. See also: Due diligence, Prudent-person rule, Twisting.

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Suitability rules. Self-regulatory organizations (SROs), such as NASD, securities exchanges, and individual brokerage firms require that stockbrokers ensure that the investments they buy for you are suitable for you.

This means, for example, that the investments are appropriate for your age, financial situation, investment objectives, and tolerance for risk.

Brokerage firms require investors opening accounts to provide enough information about their financial picture to enable the broker to know what investments would be suitable.