Search Site
Menu
Investor Suitability Requirements for Broker Dealer Recommendations

Broker dealers may make investment recommendations to investors only if the broker dealer first determines that the recommended investment would be suitable for the investor. Suitability depends upon the investor’s tolerance for risk, other investments, income, net worth, financial requirements, and investment objectives.

Self-regulatory organizations, including the New York and American Stock Exchanges and Nasdaq, publish and enforce suitability rules to guide dealing with investors. For example, Nasdaq has taken enforcement actions against brokers for recommending to their customers that they should refinance their mortgages and invest cash-out proceeds with the expectation that investment returns could be the source of mortgage payments.

Nasdaq Rule 2310 governs suitability requirements for broker dealers that are members of Nasdaq. Rule 2310(a) provides:

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.

Rule 2310 also provides that for any investment other than a money market fund, a Nasdaq member may not execute a trade in an investment recommended by the member unless the member first has made “reasonable efforts” to determine:

(1) the customer’s financial status;


(2) the customer’s tax status;


(3) the customer’s investment objectives; and


(4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.

Nasdaq has made clear in an interpretation of Rule 2310 that the “customer” referred to in Rule 2310(a) includes institutions as well as individual investors. According to Nasdaq IM-2310-3, a suitability determination for an institutional investor must consider the investor’s ability to exercise independent business judgment in evaluating an investment recommendation. IM-2310-3 concludes that “[w]here the broker-dealer has reasonable grounds for concluding that the institutional customer is making independent investment decisions and is capable of independently evaluating investment risk, then a member’s obligation to determine that a recommendation is suitable for a particular customer is fulfilled.”

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

Contact a Dedicated Texas Business Lawyer To Schedule a Consultation
Call 281-367-1222 or contact us online to schedule a meeting.

Strong In Action

  • Spring 2019

    The Strong Firm represents borrower in $42.3 million HUD construction loan for multifamily real estate development in Walton County, Florida.

    Read More
  • Spring 2019

    The Strong Firm acts as legal counsel for borrower in $32.1 million HUD construction loan for multifamily real estate development in Conroe, Texas.

    Read More
  • Spring 2019

    The Strong Firm aids borrower in $31.7 million HUD construction loan for multifamily real estate development in Nueces County, Texas.

    Read More
  • Spring 2019

    The Strong Firm represents borrower in the refinancing of a $3.57 million commercial mortgage-backed security for a commercial office facility in Montgomery County, Texas.

    Read More
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  • Peer Rated 2019 Award

Recent Blog Posts

Wait… Lawyers Do That?

Since the founding of the Strong Firm P.C. in 2004, we have prided ourselves on not only providing excellent legal services, but also playing a large role in our community. Every year I have the opportunity to speak to area students from first grade through college grad students on legal-related
Read More
Wait… Lawyers Do That?

Part II – Probate: Identify the Most Efficient Probate Proceeding – Muniment of Title

Texas law provides several options to transfer ownership of a deceased person’s (usually called a “decedent”) property. We previously discussed the difference between a dependent and an independent administration. The dependent and independent administrations are used when the deceased person’s estate exceeds some minimal thresholds for size or complexity, such
Read More
Part II – Probate: Identify the Most Efficient Probate Proceeding – Muniment of Title

But You are My Attorney, not My Dentist…

Preventive maintenance for your entity from a legal perspective   “An ounce of prevention is worth a pound of cure.” 'De Legibus' (c. 1240) by English Jurist Henry De Bracton   Potential Client:       “I have owned a limited liability company for several years. I haven’t had any issues, but someone is interested in investing
Read More
But You are My Attorney, not My Dentist…

Don’t Fall for This Chinese Trademark Scam

Don’t Fall for This Chinese Trademark Scam A trademark is any word, name or symbol used to identify and distinguish goods and services. For business owners, trademarks provide an easy way to build customer loyalty and communicate the quality and source of goods and services. Businesses often spend a great deal
Read More
Don’t Fall for This Chinese Trademark Scam
  • Video Vault


    Watch videos done by our legal team to gain a better understanding of your legal needs. Our lawyers give video insight into areas such as Real Estate, Business Law, Mergers & Acquisitions and much more.

Pay Retainer Online

Use our easy-to-use and secure online payment feature.
We accept all major credit cards.

Pay Your Retainer

Contact us

Quick Contact Form