Customer-Specific Suitability

C is correct. This recommendation violates customer-specific suitability despite potentially generating needed income. Thomas has never invested in derivatives, making a 40% allocation to options strategies unsuitable regardless of his moderate risk tolerance or income needs. Customer-specific suitability requires matching complexity and risk to the client's experience level, age, and profile. A 72-year-old with no options experience should not have nearly half his retirement assets in derivatives strategies.

A incorrectly focuses only on income generation while ignoring experience mismatch and complexity concerns. Meeting one suitability factor (income needs) does not override failing others (experience, age-appropriate risk). B incorrectly assumes general investment experience translates to derivatives expertise. 15 years of stock/bond experience does not prepare an investor for options strategies. D is incorrect because educational materials cannot substitute for actual experience with complex products, especially when allocating a substantial 40% of retirement assets.

B is correct. Customer-specific suitability (the second prong of FINRA Rule 2111) requires having a reasonable basis to believe the recommendation is suitable for THIS PARTICULAR client based on their investment profile, including factors like age, financial situation, risk tolerance, investment objectives, time horizon, liquidity needs, tax status, and experience.

A describes reasonable-basis suitability (the first prong), which focuses on understanding the product well enough to know it's suitable for someone, not this specific client. C describes quantitative suitability (the third prong), which addresses excessive trading frequency. D describes accredited investor qualification, which is a regulatory classification for certain securities offerings, not a suitability determination.

B is correct. Equity growth funds and index ETFs align with all of Maria's customer-specific factors: aggressive risk tolerance, long 30-year time horizon, growth objectives (implied by retirement timeline and age), substantial experience with equities, high income that can absorb volatility, and minimal current liquidity needs. This recommendation matches her complete investment profile.

A is unsuitable because municipal bonds are tax-inefficient inside retirement accounts (which are already tax-deferred), and conservative bonds contradict her aggressive risk tolerance. Municipal bonds generate lower yields that make sense only for taxable accounts in high brackets. B is unsuitable because money markets and CDs are far too conservative for a 35-year-old with aggressive risk tolerance and a 30-year time horizon. This recommendation would fail to provide growth needed for retirement 30 years away. D partially aligns with her risk tolerance (high-yield has credit risk) but contradicts her lack of income needs and long time horizon. Growth investments are more appropriate than income investments for someone decades from retirement.

C is correct (the EXCEPT answer). Religious beliefs and political views are NOT required factors for customer-specific suitability analysis under FINRA Rule 2111, although clients may voluntarily express preferences (e.g., socially responsible investing) that advisers can accommodate. The rule does not mandate collecting or considering religious or political information.

A is required: Investment experience and knowledge are critical factors that determine appropriate product complexity and risk levels. Recommending complex derivatives to inexperienced investors would violate customer-specific suitability. B is required: Time horizon determines appropriate investment volatility and liquidity (short-term vs. long-term investments), while liquidity needs affect whether illiquid or restricted securities are appropriate. D is required: Financial situation (income, net worth, debt) and tax status (tax bracket, account type) fundamentally affect which investments are suitable and tax-efficient for the client.

B is correct. Statements 1, 3, and 4 accurately evaluate customer-specific suitability for this recommendation.

Statement 1 is TRUE: Emerging markets funds have high volatility and risk, which aligns appropriately with David's stated aggressive risk tolerance. This match is a core element of customer-specific suitability.

Statement 2 is FALSE: This statement confuses customer-specific suitability with reasonable-basis suitability. Emerging markets investments can be suitable for certain investors (those with aggressive risk tolerance, long time horizons, and appropriate financial capacity). The question is whether they are suitable for THIS client, not whether they are suitable for anyone. David's profile suggests they are appropriate for him.

Statement 3 is TRUE: David has substantial investment experience including international stocks, and his 20-year time horizon provides sufficient time to recover from the higher volatility typical of emerging markets. Both factors support customer-specific suitability.

Statement 4 is TRUE: Growth is David's primary objective, and emerging markets offer higher growth potential (with higher risk). His high income ($350,000) and substantial assets ($800,000) provide financial capacity to absorb potential volatility and losses, making the allocation suitable for his circumstances.