The Suitability Framework

What this video covers

• Why a recommendation (buy, sell, hold, or strategy) is required to trigger the suitability rule, and why an unsolicited customer order only triggers know-your-customer (KYC)
• The three cumulative obligations (reasonable-basis, customer-specific, and quantitative) and why passing two but failing one still makes a recommendation unsuitable
• How reasonable-basis suitability attaches to the product itself before any customer exists, and what firm-level due diligence on risks, rewards, fees, and liquidity satisfies it
• How customer-specific suitability matches the recommendation to the customer's investment profile factors (age, tax status, risk tolerance, liquidity needs, investment experience, time horizon) at the moment of the recommendation
• Why quantitative suitability tests the pattern of recommended trades for excessiveness without requiring account control, and how this differs from churning which requires both control and scienter (intent to defraud)
• How the capacity to pay test can prohibit a recommendation that otherwise perfectly matches the customer's profile when ongoing premiums or commitments exceed actual financial ability