May 30, 2017
At its heart, suitability is the process of identifying a product which fits the needs and objectives of the client. The broker must “match” the customer and the security. Thus, the broker must know both the customer and the security, and make sure that the two fit. A broker must make a customer-specific determination of suitability with regard to each transaction for that customer, and tailor his recommendations to the customer’s profile and objectives.
Often overlooked in the concept of suitability is product knowledge. If a representative does not understand a product, he or she cannot make a determination as to whether the product would be suitable for a customer. The SEC recently charged UBS Financial Services with failure to supervise its registered representative by failing to educate and train them regarding certain complex financial products called Reverse Convertible Notes, and found that without sufficient education, the representatives were making unsuitable recommendations to their customers. UBS was ordered to pay more than $15 million to settle the charges. Exchange Act Release No. 78958 (September 28, 2016).
Broker-dealers and their representatives should make sure they understand the products they are recommending, especially when the products are complex.