FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsHard
A client informs their registered representative that they have decided to move all their investments into an aggressive growth fund, despite previously indicating a moderate risk tolerance and nearing retirement. The representative, eager to generate commissions, executes the transaction without further discussion or documentation of the client's change in risk profile. Which FINRA obligation has the representative most likely violated?
- AFair Dealing
- BBest Execution
- CSuitability
- DTimely Disclosure
Show answer & explanationAnswer & explanation
Correct answer: C. Suitability
The representative has a suitability obligation to ensure that recommended investments are appropriate for the client's investment profile. Executing an aggressive growth fund transaction for a client nearing retirement with a previously moderate risk tolerance, without documenting a clear change in profile, is a clear violation of suitability.
Why the other options are wrong
- A. Fair dealing is a broader ethical principle, but suitability is the specific rule governing investment appropriateness.
- B. Best execution refers to obtaining the most favorable terms for a client's transaction, not the appropriateness of the investment itself.
- D. Timely disclosure refers to providing information promptly, not the appropriateness of the investment choice.
Suitability Obligation
The obligation of a registered representative 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.
- Requires understanding client's risk tolerance, time horizon, financial situation.
- Applies to recommendations and transactions.
- Must be documented and updated as client's profile changes.
Memory trick: Suitability is like a tailored suit: it must fit the client's needs.