Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkMedium
A client at a broker-dealer asks their registered representative (RR) to invest all of their retirement savings into a single, highly volatile penny stock. The RR, knowing this is unsuitable, nonetheless executes the trade, believing the client has the right to make their own investment decisions. The client subsequently loses a substantial portion of their savings. Which of the following best describes the RR's violation?
- AEngaging in churning
- BBreach of the Best Execution rule
- CFailure to supervise
- DViolation of the suitability rule
Show answer & explanationAnswer & explanation
Correct answer: D. Violation of the suitability rule
The suitability rule requires RRs to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on the customer's investment profile. Even if a customer insists, an RR cannot execute an unsuitable recommendation without violating this rule.
Why the other options are wrong
- A. Churning involves excessive trading to generate commissions, which is not described here.
- B. Best Execution relates to obtaining the best price for a trade, not the appropriateness of the investment itself.
- C. Failure to supervise applies to supervisors overseeing RRs, not the RR's direct action.
Suitability Rule
The suitability rule requires financial professionals to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer, based on the customer's investment profile.
- Applies to recommendations made by RRs.
- Considers investment profile (age, risk tolerance, goals).
- Protects investors from inappropriate investments.
Memory trick: RRs must recommend what's right, not just what's requested.