Business Definition for: suitability rules
suitability rules
guidelines that those selling sophisticated and potentially risky financial products, such as limited partnerships or commodities futures contracts, must follow to ensure that investors have the financial means to assume the risks involved. Such rules are enforced through self-regulation administered by such organizations as the
National Association of Securities Dealers
the
securities and commodities exchanges
, and other groups operating in the securities industry. Individual brokerage firms selling the products have their own guidelines and policies. They typically require the investor to have a certain level of
networth
and
liquid asset
, so that he or she will not be irreparably harmed if the investment sours. A brokerage firm may be sued if it has allowed an unsuitable investor to buy an investment that goes sour.
See also
know your customer
Related Terms:
ethical concept in the securities industry either stated or implied by the rules of the exchanges and the other authorities regulating broker-dealer practices. Its meaning is expressed in the following paragraph from Article 3 of the NASD Rules of Fair Practice: "In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs." Customers opening accounts at brokerage firms must supply financial information that satisfies the know your customer requirement for routine purposes.
Referring Terms:
Copyright © 2006, 2003, 1998, 1995, 1991, 1987, 1985 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
