Knowing the Customer Comes Before Recommending

FINRA Rule 2090 is best known as the Know Your Customer rule. It requires every member firm to use reasonable diligence to know and keep the essential facts about every customer, from the moment an account is opened and for as long as it is maintained.

FINRA Rule 2111 is the suitability rule. It requires a firm or associated person 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.

The two rules run in sequence: Rule 2090 gathers the facts, and Rule 2111 uses them whenever a recommendation is made. Our FINRA rules quick reference on membership and registration places both rules among the conduct standards that appear on the exams.

Charge into 2027 exam season with the FRC playlists on YouTube

What Rule 2090 Requires

FINRA Rule 2090 requires every member to use reasonable diligence, in opening and maintaining every account, to know and retain the essential facts concerning every customer and the authority of each person acting on the customer’s behalf. The obligation applies to every customer, whether or not the firm ever makes a recommendation.

Essential facts are those needed to service the account effectively, act on any special handling instructions, understand the authority of each person acting for the customer and comply with applicable laws, regulations and rules. A firm needs to know who it is dealing with, who can give instructions and what rules apply to the account.

The obligation starts at the beginning of the relationship, before any recommendation is made. The Securities Industry Essentials (SIE) Examination Preparation course at FRC covers Rule 2090 as part of the account-opening material the SIE tests.

What Rule 2111 Requires

FINRA Rule 2111 applies when a firm or associated person recommends a transaction or investment strategy involving a security. The recommendation must be suitable for the customer, based on information obtained through reasonable diligence about the customer’s investment profile.

The investment profile includes the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, risk tolerance and any other information the customer discloses. Rule 2111 covers strategies as well as individual trades, including a recommendation to hold a security.

The Series 7 Exam Preparation course at FRC works through Rule 2111 in depth, because representatives apply it every time they make a recommendation to a customer.

Rule 2090 and Rule 2111 Compared

The Three Suitability Obligations

Rule 2111 contains three main obligations. Reasonable-basis suitability requires the firm or representative to understand the security or strategy well enough to believe it is suitable for at least some investors.

Customer-specific suitability requires a reasonable basis to believe the recommendation is suitable for the particular customer, based on that customer’s investment profile. A product that suits a wealthy, experienced investor with a long horizon may be unsuitable for a retiree who needs income and access to cash.

Quantitative suitability requires a reasonable basis to believe that a series of recommended transactions, even if each is suitable on its own, is not excessive when taken together. This obligation targets excessive trading, often called churning.

Worked Example: Quantitative Suitability

Regulators often look at two measures when reviewing trading activity. The turnover ratio divides the total cost of purchases in a year by the average equity in the account, and the cost-to-equity ratio divides the year’s commissions and other costs by the average equity.

Worked example: an account has average equity of $100,000 and purchases totaling $600,000 during the year. Step one: the turnover ratio is $600,000 divided by $100,000, or 6, meaning the account’s holdings were replaced about six times.

Step two: commissions and fees for the year are $25,000, so the cost-to-equity ratio is $25,000 divided by $100,000, or 25 percent. The account would need to earn 25 percent just to break even, figures that are often cited as signs of excessive trading.

How the Two Rules Connect

The facts gathered under Rule 2090 form the starting point for the suitability analysis under Rule 2111. A representative cannot judge whether a recommendation fits a customer without knowing the customer’s finances, goals and situation.

Rule 2111 asks for more than Rule 2090. Know Your Customer focuses on the essential facts needed to service the account, while suitability requires the full investment profile before a recommendation is made.

Worked example: step one, at account opening the firm records the customer’s identity, address, employment, the authority of a spouse to trade and a request for paper statements, meeting Rule 2090. Step two, before recommending a bond fund, the representative confirms the customer’s objectives, time horizon, liquidity needs and risk tolerance, meeting Rule 2111.

Study Conduct Rules With FRC

Questions on these rules usually test which rule is called Know Your Customer, what the investment profile includes, the three suitability obligations and when Regulation Best Interest applies instead. Our SIE and Series 7 courses work through each rule with exam-style examples.

Consider studying with FRC for every exam on your route. Explore our USA exam courses, from the SIE through the Series 7, Series 63 and Series 65.

To take advantage of the membership, explore FRC Professional Membership, which gives you a verified Digital Profile that shows employers your real-time course progress, together with the Video Resume. Current offers are on our membership deals page.

Where Regulation Best Interest Fits

Since June 30, 2020, the SEC’s Regulation Best Interest has governed recommendations that broker-dealers make to retail customers. FINRA amended Rule 2111 so that it does not apply to recommendations covered by Regulation Best Interest.

Rule 2111 therefore still matters for recommendations to customers who are not retail customers under Regulation Best Interest, such as many institutional accounts. Regulation Best Interest itself carries forward the core ideas of suitability within its care obligation, with added duties covering disclosure, conflicts of interest and compliance.

Rule 2090 is unaffected. Every firm must still know the essential facts about every customer, retail or institutional, whether or not any recommendation is made.

The Institutional Customer Exemption

Rule 2111 offers relief for institutional accounts. A firm meets its customer-specific obligation for an institutional customer if it has a reasonable basis to believe the customer can evaluate investment risks independently, and the customer affirmatively indicates it is exercising independent judgment.

Institutional accounts are defined in FINRA Rule 4512 and include banks, insurance companies, registered investment companies, registered investment advisers and other persons with total assets of at least $50 million. Large professional investors are expected to make their own judgments.

The exemption covers only the customer-specific obligation. Reasonable-basis suitability and quantitative suitability still apply, so a firm must still understand what it recommends and avoid excessive trading.

The Authority to Act on an Account

Rule 2090 requires firms to know the authority of each person acting on behalf of the customer. That includes holders of a power of attorney, trustees, guardians, corporate officers and anyone with trading authority on a joint or business account.

A firm that accepts instructions from someone without proper authority can expose the customer to losses and itself to liability. Representatives confirm and record authority before acting on instructions from anyone other than the account owner.

Knowing who can act also connects to customer protection rules. Our comparison of FINRA Rule 2165 vs Rule 4512 explains how firms protect older customers when someone tries to take control of their money.

Keeping Customer Information Current

Rule 2090 applies to maintaining accounts as well as opening them. A customer’s circumstances change through retirement, marriage, divorce, inheritance or a change in health, and a recommendation that suited them five years ago may not suit them today.

Firms periodically ask customers to review and update their account information. Representatives also update the profile when a customer mentions a significant change in conversation, rather than waiting for a scheduled review.

Outdated information weakens every suitability decision built on it. A firm that recommends a long-term, high-risk strategy to a customer who has since retired and needs income may breach its suitability obligation even though its records looked complete when the account was opened.

Strategies and Recommendations to Hold

Rule 2111 covers investment strategies, not just individual trades. A recommendation to use margin, to concentrate in one sector or to follow a particular trading approach is subject to suitability even if no specific security is named.

An explicit recommendation to hold a security is also a recommendation for suitability purposes. If a representative tells a customer to keep a position that no longer fits their profile, that advice can be reviewed in the same way as a recommendation to buy.

Worked example: step one, a customer asks whether to keep a large position in a single technology stock that now makes up 60 percent of her account. Step two, the representative tells her to hold it. Step three, because she is nearing retirement with a low risk tolerance, that hold recommendation must meet the same suitability standard as a purchase would.

Common Suitability Problems

Concentration is one of the most frequent issues. Recommending that a customer put a large share of their assets into a single stock, sector or product can be unsuitable even if the investment itself is sound.

Complexity is another. Leveraged and inverse products, options strategies and some structured products may suit only experienced investors who understand how they behave, so recommending them to a novice is a common breach.

Liquidity mismatches round out the list. Recommending long lock-up investments, or products with heavy surrender charges, to a customer who may need cash soon conflicts with the liquidity needs recorded in their profile. Each of these problems traces back to information the firm should already hold under Rule 2090.

When a Customer Will Not Share Information

Some customers decline to provide parts of their investment profile, such as their net worth or other holdings. The firm can still open and maintain the account, but it must consider whether it has enough information to make a suitable recommendation.

If key information is missing, the representative may need to limit recommendations or explain to the customer why the information matters for the advice. Recommending without enough information to judge suitability is itself a risk.

Firms document both what the customer provided and what they declined to provide. That record shows how the firm reached each recommendation if questions are later raised.

Clear notes also protect the representative. If a customer later complains that an investment was unsuitable, a dated record of the profile, the recommendation and the reasoning behind it is often the strongest evidence that the representative met both rules.

The Memory Aid

Remember “2090 knows, 2111 shows”: Rule 2090 is about knowing the customer, and Rule 2111 is about showing that each recommendation fits them.

For the suitability obligations, remember “basis, customer, quantity”: reasonable-basis, customer-specific and quantitative suitability.

For timing, remember “KYC from day one, suitability at the recommendation”: Rule 2090 applies from account opening, Rule 2111 applies when a recommendation is made.

Exam Traps to Avoid

The first trap is calling Rule 2111 the Know Your Customer rule. Rule 2090 is Know Your Customer; Rule 2111 is suitability.

The second trap is assuming Rule 2090 applies only when recommendations are made. It applies to every customer account, from opening and throughout the relationship.

The third trap is forgetting that Regulation Best Interest, not Rule 2111, governs recommendations to retail customers. The fourth trap is assuming the institutional exemption removes all suitability duties; it covers only customer-specific suitability, not the reasonable-basis or quantitative obligations.

A Client Scenario

A new customer opens an account and provides his name, address, date of birth and employment, and names his wife as having trading authority. The firm records these facts and confirms his wife’s authority in writing, meeting its Know Your Customer obligation.

A month later, the representative wants to recommend a leveraged exchange-traded product. Before doing so, she reviews his objectives, time horizon, liquidity needs and risk tolerance and learns he is saving for a house purchase next year and has little investment experience.

She concludes the product is unsuitable for him and recommends a short-term bond fund instead. She records the profile information and her reasoning in the file, which supports the recommendation if it is ever reviewed.

The Dictionary as a Video Library

The FRC dictionary is a study tool, not just a glossary. Every entry pairs a written explanation with deep-dive video, on-page quizzes and interactive flash cards, so you can read a concept, watch it explained and test yourself in one place.

Rules are covered in the same depth: open a rule and you will find the full explanation alongside video walk-throughs of how it applies in practice. Open the FINRA Rule 2090 and Rule 2111 entries to see Know Your Customer and suitability explained on video and test yourself with the quizzes.

Practice Questions to Test Yourself

Question one: FINRA Rule 2090 is best known as what? The Know Your Customer rule.

Question two: Which suitability obligation requires a representative to understand a product well enough to believe it suits at least some investors? Reasonable-basis suitability.

Question three: An account with average equity of $50,000 has purchases of $400,000 in a year. What is the turnover ratio? 8.

Question four: Does Rule 2111 govern recommendations to retail customers today? No; Regulation Best Interest governs those recommendations.

Question five: Which suitability obligation can be met for an institutional customer that indicates it is exercising independent judgment? Customer-specific suitability.

Turn Rule Knowledge Into Career Evidence

Every recommendation a representative makes rests on knowing the customer, and firms look for candidates who understand that from day one. FRC’s Digital Profile shows employers the courses you are actively studying and the progress you have earned through assessed learning, verified by FRC, and a QR code on your resume takes them straight to it.

The FRC Video Resume lets a hiring manager hear you before the interview. Explaining how you would turn a customer’s profile into a suitable recommendation shows the judgment broker-dealers look for.

Related Questions

Matching a higher-risk asset class to a customer’s horizon and tolerance is suitability in action, as our article on how much of a portfolio should be in emerging markets shows.

Key Points to Retain

FINRA Rule 2090, the Know Your Customer rule, requires reasonable diligence to know and retain the essential facts about every customer and the authority of anyone acting for them, from account opening onward. FINRA Rule 2111, the suitability rule, requires a reasonable basis to believe each recommendation suits the customer’s investment profile, through reasonable-basis, customer-specific and quantitative obligations.

Regulation Best Interest now governs recommendations to retail customers, while Rule 2111 still applies to others, with a customer-specific exemption for qualifying institutional accounts. Know Your Customer applies to every account regardless of recommendations.

Once the rules are mastered, the next step is registration, explained in our guide to whether you need sponsorship to take the Series 7.