Suitability in Securities Transactions

This article addresses the suitability doctrine under the federal securities laws--the duty on the part of the broker to recommend to a customer only those securities which are suitable to the investment objectives and peculiar needs of that particular customer. The suitability doctrine entails the matching of two elements: (i) the investment objectives, peculiar needs and other investments of the particular customer with (ii) the characteristics of the security which is being recommended. All of the suitability rules of the various self-regulatory organizations -- the NASD, the NYSE, the Chicago Board Options Exchange and the Municipal Securities Rulemaking Board -- are analyzed. Disciplinary actions under the suitability rules of these self-regulatory organizations are discussed. The SEC's role in the development of the suitability doctrine over the years is traced. Finally, private damage actions based upon the suitability doctrine under federal laws, state law, and in arbitration proceedings are compared