Quantitative Suitability

B is correct. This scenario likely violates quantitative suitability under FINRA Rule 2111. While each individual trade may pass reasonable-basis suitability (appropriate for some growth investors) and possibly customer-specific suitability (aligned with Thomas's stated objectives), the series of transactions appears excessive: 4.5x turnover ratio and 6.5% cost-to-equity ratio ($6,500 / $100,000) for a long-term growth account suggests over-trading. Quantitative suitability requires evaluating whether the collective frequency and costs are appropriate for the client's profile.

A fails to consider the third prong of suitability. meeting reasonable-basis and customer-specific requirements is insufficient if the series of trades is excessive. C incorrectly suggests positive returns justify excessive trading. quantitative suitability focuses on trading frequency and costs, not performance. D is incorrect because quantitative suitability applies regardless of discretionary authority. in fact, discretionary accounts require heightened scrutiny for excessive trading.

C is correct. Quantitative suitability requires the broker-dealer to have a reasonable basis to believe that a series of recommended transactions is not excessive when viewed collectively in light of the customer's investment profile. This prong addresses over-trading and churning concerns by evaluating the frequency, volume, and costs of transactions as a whole, rather than individually.

A describes reasonable-basis suitability (first prong), which requires understanding that a security or strategy is suitable for at least some investors. B describes customer-specific suitability (second prong), which requires the recommendation be appropriate for the particular customer based on their investment profile. D is not a defined suitability prong under FINRA Rule 2111, though financial situation is a factor in customer-specific suitability.

C is correct. This trading pattern likely does not violate quantitative suitability. A 3.2x turnover ratio and 4.8% cost-to-equity ratio, while representing meaningful activity, are not inherently excessive for a moderate-risk retirement account with a 10-year time horizon. These metrics fall below the typical red-flag thresholds (6x+ turnover, 20%+ cost-to-equity) and could be consistent with active portfolio management appropriate for the client's profile. Quantitative suitability requires evaluating whether the series of transactions is excessive in light of the customer's investment profile.

A is incorrect because performance relative to a benchmark is not the determinant of quantitative suitability. the focus is on trading frequency and costs, not investment returns. B is incorrect because no absolute transaction count definitively proves excessive trading. context matters: 38 trades might be excessive for a conservative buy-and-hold investor but reasonable for an active moderate-risk strategy. D misses the point: passing customer-specific suitability (individual trade appropriateness) does not automatically satisfy quantitative suitability; the series must also be evaluated collectively.

C is correct (the EXCEPT answer). Quantitative suitability applies to ALL customer accounts, regardless of whether the broker has discretionary authority. In fact, accounts with discretionary authority may warrant heightened scrutiny for excessive trading since the broker has control over trading decisions. The presence or absence of discretionary authority does not exempt the broker from quantitative suitability obligations.

A is accurate: Quantitative suitability is the third prong of FINRA Rule 2111 and specifically addresses whether a series of recommended transactions is excessive in light of the customer's investment profile. B is accurate: This is a critical concept. a broker can pass reasonable-basis and customer-specific suitability (each individual trade is appropriate) but still fail quantitative suitability if the collective frequency or volume is excessive. D is accurate: While no absolute thresholds exist, turnover ratios (how many times the portfolio is replaced annually) and cost-to-equity ratios (total costs as a percentage of account equity) are quantitative metrics used to identify potential violations.

A is correct. Only Account 1 raises clear quantitative suitability concerns.

Account 1 (Statement 1) is TRUE: A conservative retiree with 7.5x turnover and 18% cost-to-equity ratio raises serious quantitative suitability concerns. The high turnover and costs are inconsistent with conservative objectives focused on preservation and income. Even though each individual trade may be suitable for income investors, the excessive frequency violates quantitative suitability.

Account 2 (Statement 2) is FALSE: While 5x turnover and 8% cost-to-equity are meaningful, they may be appropriate for an aggressive 30-year-old growth investor with a long time horizon. The trading activity aligns with the aggressive profile and does not clearly violate quantitative suitability.

Account 3 (Statement 3) is FALSE: 2.5x turnover and 3.5% cost-to-equity are reasonable for a moderate investor and do not raise quantitative suitability concerns. This represents active but not excessive management.

Account 4 (Statement 4) is FALSE: Despite very high metrics (12x turnover, 15% cost-to-equity), this client has speculation objectives and identifies as a short-term trader. The trading pattern aligns with the customer's stated investment profile. Quantitative suitability evaluates excessiveness "in light of the customer's investment profile," and active trading may be appropriate for speculators.