Suitability Obligations
The suitability requirements for institutional customers specified in MSRB Rule G-19, as well as the SEC's suitability requirements for retail customers, both specify the following three suitability obligations.
• Reasonable-basis obligation. A dealer must understand the complexity and risks of a security or investment strategy and consciously determine whether it is suitable for at least some investors. If a dealer does not understand the risks and mechanics of mortgage-backed securities, for example, it is a suitability violation to recommend them to investors. In addition, if a dealer’s due diligence finds that the risks of a particular security are so great that even an aggressive investor would not be intereste