A broker who makes a recommendation to a customer must have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer and his or her investment objectives. FINRA Rule 2111 is the starting point for a suitability analysis
Suitability is a common customer complaint. Here the customer alleges that the broker recommended investments that were not appropriate for his investment goals, or even his age and investment objectives. Unsuitability is another problem in securities arbitrations, since the claim is typically made after the entire account loses money, rather than at the close of a truly unsuitable investment.
Arbitrators often struggle with unsuitability claims, as the inquiry requires a determination, often without expert witnesses, of just what is suitable for the customer. These claims have potential for disaster for the broker, since a customer who was perfectly well informed of the risks, and willing to take same, may later claim unsuitability. If the investment was not within reasonable guidelines for the customer, the broker may have been found to have made an unsuitable recommendation, even years after the fact, and despite similar profitable investments in the same account. Brokers need to make sure that they understand the risks of the various products they recommend, and that the customers understand those same risks..
Account documentation can be critical in arbitrating these types of claims. As in the case of unauthorized trading, SRO rules come into play in suitability claims, and can lead to enforcement proceedings. Rules of Fair Practice requires a member to have reasonable grounds for believing that a recommendation is suitable for the customer based on other securities holdings, the customer’s financial situation and his investment needs.
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