Reasonable Basis Suitability

B is correct. David violated reasonable basis suitability by recommending a complex structured product without performing adequate due diligence. Reasonable basis requires the adviser to understand the product's features, risks, returns, costs, and liquidity through reasonable investigation BEFORE recommending it to ANY client. Relying solely on a wholesaler's sales pitch without reading the prospectus or understanding the derivative structure is insufficient.

A is incorrect because customer-specific suitability addresses whether the product matches each individual client's profile, not the adviser's product understanding. While David may have also violated customer-specific suitability, the primary violation is reasonable basis. C is incorrect because quantitative suitability addresses excessive trading frequency or turnover, not the number of different clients receiving the same recommendation. D is incorrect because advisers cannot delegate their due diligence obligation to wholesalers; they must independently verify and understand products before recommending them.

B is correct. Reasonable basis suitability requires the adviser to have a reasonable basis to believe that a security or investment strategy is suitable for at least SOME investors before recommending it to ANY client. This requires understanding the product through reasonable diligence, including its features, risks, potential returns, costs, and complexity.

A describes customer-specific suitability (the second prong), which requires matching the recommendation to the individual client's profile. C describes quantitative suitability (the third prong), which addresses excessive trading even when individual transactions are suitable. D is incorrect because reasonable returns are not the standard; the standard is understanding whether the product is suitable for some category of investors based on its risk-return profile.

B is correct. Reading the prospectus and thoroughly understanding the ETN's mechanics, risks (including credit risk since ETNs are debt instruments of the issuer), and liquidity directly satisfies reasonable basis suitability. The adviser must understand WHAT they're recommending BEFORE recommending it to ANY client.

A addresses customer-specific suitability (matching the investment to the client's profile), not reasonable basis suitability (understanding the product itself). C addresses quantitative suitability or concentration risk management, not whether the adviser understands the product. D addresses customer-specific suitability by considering client experience, but does not establish that the adviser has adequate product understanding.

C is correct (the EXCEPT answer). This statement is FALSE. Reasonable basis suitability is about understanding the PRODUCT, not about client matching. Just because a product is suitable for one client does NOT mean the adviser has established reasonable basis for understanding the product itself. Reasonable basis requires independent due diligence and investigation of the product's characteristics, regardless of individual client profiles. Additionally, customer-specific suitability (not reasonable basis) determines whether a product matches a particular client.

A is accurate: Reasonable basis requires understanding product features, risks, potential returns, costs, and complexity through reasonable diligence. B is accurate: Reasonable basis is the first prong and must be satisfied BEFORE making recommendations to anyone. D is accurate: The standard is "suitable for at least some investors," not all investors. a highly risky derivative might be suitable for sophisticated traders but not for conservative retirees, and that's acceptable if the adviser understands it.

C is correct. Statements 1, 2, and 4 satisfy reasonable basis suitability.

Statement 1 is TRUE: Attending product training helps the adviser understand the features and benefits, contributing to reasonable basis. However, training alone from the product issuer is typically insufficient without independent verification.

Statement 2 is TRUE: Reading the prospectus and understanding fees, surrender charges, and payout mechanics directly satisfies the requirement to understand the product's features, risks, and costs. This is essential for reasonable basis.

Statement 3 is FALSE: Verifying that existing clients might be suitable for the product addresses customer-specific suitability (client matching), NOT reasonable basis suitability (product understanding). Reasonable basis must be established BEFORE considering any individual clients.

Statement 4 is TRUE: Researching independent third-party analyses demonstrates reasonable diligence by going beyond issuer-provided materials to understand broader risks and cost comparisons. This strengthens the reasonable basis determination.