Quantitative Suitability

Over 14 months a representative at Drayton Securities recommends 96 in-and-out trades in Hollis Rutherford's account, producing a cost-to-equity ratio that the firm's surveillance system flags as excessive for his stated profile. Hollis approved each trade himself before entry, and the representative never held discretion or exercised de facto control over the account. Under FINRA Rule 2111 as amended, can the quantitative suitability obligation be violated on these facts?

1. A.No, because Hollis approved each trade, so no recommendation was ever made.Wrong. Customer approval of an order does not erase the fact that the representative recommended it.
2. B.No, because quantitative suitability still requires proof that the representative had actual or de facto control of the account.Wrong. The amendment deleted the control element from the quantitative suitability analysis.
3. C.Yes. The control element was removed, so a series of recommended transactions that is excessive and unsuitable for the customer's profile violates the rule even in a non-discretionary account.Correct. Excessiveness measured against the investment profile is now sufficient.
4. D.Yes, but only if the firm also has written discretionary authority on file for the account.Wrong. Written discretion is not a prerequisite; its absence is precisely what no longer matters.

Why: FINRA amended Rule 2111 to remove the element requiring proof that the representative controlled the account. Quantitative suitability now turns on whether a series of recommended transactions, taken together, is excessive and unsuitable in light of the customer's investment profile. Because the representative recommended each trade, the rule reaches the pattern even though Hollis approved every order and the account was fully non-discretionary.

Regulators reviewing an account for EXCESSIVE TRADING typically examine which quantitative measures?

1. A.The number of profitable versus losing tradesWrong. Win rates measure luck and skill - churning measures COST burden.
2. B.Annualized turnover rate and the cost-to-equity ratioCorrect. Those two metrics quantify excessive trading.
3. C.The account's beta against the S&P 500Wrong. Market risk statistics are irrelevant to trading frequency abuse.
4. D.The broker's years of experienceWrong. Tenure has no place in the quantitative analysis.

Why: Excessive trading analysis rests on annualized turnover and the cost-to-equity percentage, benchmarked against the customer's objectives; under Reg BI the control element was eliminated, so recommendations alone can create liability. Citation: FINRA Rule 2111.05(c); Reg BI adopting release. Takeaway: turnover and cost-to-equity tell the churning story - control no longer required.

Over eight months, a representative recommends 60 short-term trades in a retail customer's modest account, producing a cost-to-equity ratio above 30 percent. The customer approved every trade, and the representative held NO discretionary authority. Under Regulation Best Interest:

1. A.The series of recommendations violates the Care Obligation - excessive trading is measured against the customer's profile, and control is NOT requiredCorrect - quantitative care applies to recommended series regardless of discretion or approval.
2. B.A violation only if the account also shows net lossesProfitability is irrelevant - excessive costs and turnover relative to the profile are the test.
3. C.No violation, because the customer authorized every tradeAuthorization does not sanitize a recommended pattern that is excessive for the customer.
4. D.No violation, because quantitative analysis applies only to discretionary accountsThat was the old control requirement - Reg BI eliminated it for recommended transactions.

Why: The Care Obligation includes a quantitative component: a SERIES of recommended transactions must not be excessive in light of the customer's investment profile - and unlike the old suitability regime, no control over the account is required. Customer approval of each trade does not cure excessive recommendation activity. The clue is the extreme cost-to-equity ratio driven by recommendations. Review: Reg BI Care Obligation.