Suitability and Know Your Customer: Rules 2090, 2111, and Reg BI

Most SIE material still teaches FINRA Rule 2111 suitability as the standard governing recommendations to retail customers.

It isn’t. FINRA amended Rule 2111 so that it does not apply to recommendations subject to Regulation Best Interest — a change effective June 30, 2020, spelled out in Supplementary Material .08 to the rule. For a recommendation to an ordinary retail customer, the governing standard is Reg BI’s best-interest obligation, not suitability.

Rule 2111 didn’t disappear. It moved. Understanding where it moved to is most of what this topic actually tests.

The short answer

Three things govern recommendations, and they do different jobs:

Rule 2090 (Know Your Customer) — use reasonable diligence to know and retain the essential facts about every customer and about anyone authorised to act for them. This applies at account opening and on an ongoing basis. It is fully in force and unaffected by Reg BI.

Rule 2111 (Suitability) — the recommendation must be suitable based on the customer’s investment profile. Since June 30, 2020, this does not apply where Reg BI applies. It survives for institutional customers and for natural persons who aren’t using the recommendation for personal, family, or household purposes.

Regulation Best Interest — the SEC standard, adopted June 5, 2019 and effective June 30, 2020. It applies to recommendations to retail customers and requires acting in the customer’s best interest without placing the firm’s interests ahead of theirs. Four component obligations: Disclosure, Care, Conflict of Interest, Compliance.

The sequence to remember: 2090 is how you learn about the customer. Reg BI or 2111 is the standard the recommendation must then meet. Which of the two depends on who the customer is.

The full answer

Rule 2090: know your customer

The rule requires every member to use reasonable diligence, in regard to the opening and maintenance of every account, to know and retain the essential facts concerning every customer and concerning the authority of each person acting on the customer’s behalf.

“Essential facts” means the facts required to:

• Effectively service the customer’s account
• Act in accordance with any special handling instructions
• Understand the authority of each person acting on behalf of the customer
• Comply with applicable laws, regulations, and rules

Two features matter for the exam.

It’s ongoing, not one-time. The rule says opening and maintenance. Circumstances change — a customer retires, inherits money, has a child — and the file has to keep up.

It covers authority, not just identity. If someone holds a power of attorney or trades on a corporate account, you need to know that they’re actually authorised. This is the part candidates forget, and it’s specifically named in the rule.

KYC is the foundation. You can’t meet any recommendation standard without it, because every standard depends on knowing who you’re recommending to.

Rule 2111: the three suitability obligations

Rule 2111 requires a reasonable basis to believe a recommended transaction or strategy is suitable for the customer, based on information obtained through reasonable diligence to ascertain 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, investment time horizon, liquidity needs, risk tolerance, and any other information the customer discloses.

The rule identifies three obligations:

Obligation	What it requires
Reasonable-basis	You understand the product’s risks and rewards well enough to believe it’s suitable for at least some investors
Customer-specific	It’s suitable for this particular customer, given their profile
Quantitative	A series of transactions, even if each is individually suitable, isn’t excessive when taken together

Reasonable-basis is about the product. Customer-specific is about the person. Quantitative is about the pattern.

What changed on June 30, 2020

The SEC adopted Reg BI on June 5, 2019, with a compliance date of June 30, 2020.

This created an overlap problem. Reg BI’s Care Obligation addresses the same conduct that Rule 2111 addressed for retail customers, but applies a best interest rather than a suitability standard. Absent action, firms would have had to comply with both.

FINRA’s reasoning was that a broker-dealer meeting the best-interest standard would necessarily meet the suitability standard — so requiring both was duplicative. It amended Rule 2111 to state that it will not apply to recommendations subject to Reg BI.

FINRA didn’t eliminate the suitability rule, because some recommendations still fall outside Reg BI’s scope.

Which standard applies to whom

Reg BI defines a retail customer as a natural person, or the legal representative of such a person, who receives a recommendation and uses it primarily for personal, family, or household purposes.

That definition does more work than it looks like:

Customer	Standard
An individual investing their own savings	Reg BI
A retiree rolling over a 401(k)	Reg BI
A pension fund	Rule 2111
A corporation or institutional entity	Rule 2111
A small business owner acting for the business	Rule 2111
A charitable trust	Rule 2111

The last two are the interesting ones. They’re natural persons or their representatives, but the recommendation isn’t for personal, family, or household purposes — so Reg BI doesn’t reach them and Rule 2111 still governs. FINRA named exactly these examples when explaining why it kept the suitability rule.

Note also: Rule 2111 has always carried an exemption from customer-specific suitability for institutional customers, where the account meets the institutional account definition in Rule 4512(c) — which includes any entity with total assets of at least $50 million — the firm reasonably believes the customer can independently evaluate investment risks, and the customer affirmatively indicates it is exercising independent judgment. Reasonable-basis and quantitative obligations still apply.

The change almost nobody teaches

When FINRA amended Rule 2111, it made a second change: it removed the element of control from the quantitative suitability obligation.

Under the old formulation, quantitative suitability required that the broker exercise actual or de facto control over the customer’s account. That was the traditional churning analysis — excessive trading plus control.

Control is gone. A pattern of excessive trading can now violate quantitative suitability without the firm having to be shown to control the account.

If your study material still says quantitative suitability requires control, it predates June 2020.

Reg BI’s four obligations

Obligation	What it requires
Disclosure	Provide full and fair written disclosure of material facts about the relationship — scope, terms, fees, and material conflicts. This is what Form CRS delivers
Care	Exercise reasonable diligence, care, and skill: understand risks, rewards and costs; have a reasonable basis to believe the recommendation is in the customer’s best interest; consider reasonably available alternatives; and not place the firm’s interest ahead of the customer’s
Conflict of Interest	Maintain written policies to identify and then eliminate, mitigate, or disclose conflicts. Sales contests, quotas, and bonuses tied to specific securities within a limited period must be eliminated, not merely disclosed
Compliance	Maintain written policies and procedures reasonably designed to achieve compliance with Reg BI as a whole

Two things Reg BI adds that Rule 2111 never required:

It obliges you to consider reasonably available alternatives. Suitability asked whether the recommendation was appropriate; best interest asks whether something better was available and ignored.

It covers recommendations of account types — brokerage versus advisory, or a rollover from an employer plan into an IRA. That’s a recommendation about a container, not a security, and Reg BI reaches it explicitly.

The trigger is a recommendation

This is heavily tested and easy to miss: none of these standards applies unless there is a recommendation.

An unsolicited order — the customer calls and says “buy me 100 shares of XYZ,” with no prompting — doesn’t trigger Reg BI or Rule 2111. The customer made the decision. Rule 2090 still applies, because you still have to know your customer, but the recommendation standards don’t engage.

Whether something is a recommendation turns on whether a communication would reasonably be viewed as a call to action, and how individually tailored it is. General educational material and neutral market data typically aren’t recommendations. A message urging a specific customer toward a specific security is.

What “best interest” actually adds

Suitability asked: is this appropriate for this customer?

Best interest asks: is this in this customer’s best interest, considering what else was reasonably available, and without placing my interests ahead of theirs?

The practical difference shows up with two comparable products where one pays the rep more. Under suitability, if both were appropriate, recommending the higher-paying one was defensible. Under Reg BI’s Care Obligation, the requirement to consider reasonably available alternatives and to not put your interest first makes that harder to justify.

One limitation worth knowing: Reg BI does not create a private right of action. Investors can’t sue directly for a violation. Enforcement runs through the SEC and FINRA, and investor claims typically go through FINRA arbitration.

Common misconceptions

“Rule 2111 is the standard for retail recommendations.” Not since June 30, 2020. Rule 2111.08 states the suitability rule doesn’t apply to recommendations subject to Reg BI. Retail runs on Reg BI.

“Reg BI replaced Rule 2111 entirely.” No. Rule 2111 still governs recommendations to institutions, pension funds, small business owners acting for the business, and charitable trusts.

“Quantitative suitability requires control of the account.” It did. FINRA removed the control element in the same 2020 amendment.

“KYC and suitability are the same thing.” Rule 2090 is about gathering and retaining essential facts, including who’s authorised to act. Rule 2111 and Reg BI are standards a recommendation must meet. Different jobs.

“Reg BI applies to any individual.” Only where the recommendation is used primarily for personal, family, or household purposes. A natural person acting for their business falls outside it.

“Reg BI only covers securities recommendations.” It also covers recommendations of account types, including rollovers.

“An unsolicited order still needs a suitability analysis.” No recommendation, no recommendation standard. Rule 2090 still applies.

“Conflicts just have to be disclosed.” Some must be eliminated — notably sales contests and quotas tied to specific securities within a limited time period.

What to do with this info

1. Fix the mental default. Retail customer means Reg BI. Institution or business-purpose means Rule 2111. That single sort answers most questions on this topic.
2. Keep 2090 separate in your head. It’s the fact-gathering rule and it applies to everyone, always, recommendation or not.
3. Memorise the two sets of components — reasonable-basis / customer-specific / quantitative for 2111, and Disclosure / Care / Conflict of Interest / Compliance for Reg BI. Questions frequently ask you to name or match them.
4. Check your other study material for the control element. If it says quantitative suitability requires control, it’s pre-2020 and other things in it may be stale too.
5. Watch for the recommendation trigger. If a scenario describes an unsolicited order, the answer usually turns on the absence of a recommendation.
6. Remember alternatives. “Consider reasonably available alternatives” is the phrase that most cleanly separates best interest from suitability.

Related resources

• The SIE exam glossary — 170 terms in plain English, including the regulatory vocabulary above
• Systematic vs unsystematic risk — the risk analysis that feeds a customer’s investment profile
• Every number and formula on the SIE — the regulatory thresholds worth memorising
• SIE exam explained: format, scoring, subjects — where this material sits in the exam weighting
• How to read SIE exam questions — spotting the customer-type cue that decides which standard applies
• Free SIE practice exam — a domain-scored diagnostic