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 what is suitable for the customer.
When analyzing a securities arbitration claim for suitability, you would need to consider several factors to determine whether the financial advisor or broker recommended investments that were suitable for the investor.
Investor’s Profile:
Look at the investor’s age, investment experience, net worth, income, tax bracket, and investment objectives. The investments must be suitable for the investor’s financial situation and goals.
Risk Tolerance:
Consider the investor’s risk tolerance, or how much risk the investor is willing to take on. The investments must match the investor’s risk tolerance.
Product Characteristics:
Analyze the characteristics of the investment products recommended, such as liquidity, volatility, and potential returns. The investments must match the investor’s risk tolerance and investment objectives.
Disclosure:
Look at the disclosures made by the financial advisor or broker, including any warnings or limitations of the investments recommended.
Sales Practice:
Investigate whether the financial advisor or broker made any misrepresentations or omissions when recommending the investments.
It’s important to note that this is a general overview of how to analyze a securities arbitration claim for suitability, and that the specific facts of each case will vary. It’s advisable to consult with a lawyer who has experience with securities arbitration and suitability claims to help you navigate the process and build a strong case.
These claims are often a problem, 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 might 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 ensure 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 require 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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