Investors May be Able to Recover Losses Arising from Unsuitable Investment Recommendations
The Financial Industry Regulatory Authority (FINRA) requires that stockbrokers and brokerage firm to adhere to FINRA Rule 2111 – the FINRA Suitability Rule. The Suitability Rule requires that each stockbroker and brokerage firm to ensure that their recommendation of investment products, asset allocation, or trading strategies are “suitable” for those firm customers – meaning that the recommendation is appropriate for the customer given their particular circumstances. The suitability rule incorporates three (3) main suitability obligations by which stockbrokers and brokerage firms must abide:
- Reasonable-basis suitability – This suitability obligation requires brokerage firms to have a reasonable basis to believe, based on reasonable due diligence, that a particular security or investment strategy is suitable for at least some investors. Reasonable due diligence varies depending on the complexity of and risks associated with the security or investment strategy. Due diligence must be conducted by the brokerage firm and potential risks and rewards associated with the security or investment strategy must be communicated to the stockbroker before allowing him to recommend the security or investment strategy to customers.
- Customer-specific suitability – This suitability obligation requires stockbrokers to have a reasonable basis to believe that a recommended security or investment strategy is suitable for the particular customer based on the customer’s investment profile which includes the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the stockbroker in connection with the recommendation. The stockbroker must take all factors into consideration before recommending a specific security or investment strategy to the customer.
- Quantitative suitability – This suitability obligation requires stockbrokers who have actual or “de facto” control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions are not excessive and unsuitable for the customer when invested in a large concentration and when considering the customer’s investment profile. Therefore, even if a small investment in the same or similar product may be suitable for the customer, a large concentration of the investment may be unsuitable. The stockbroker must consider factors such as turnover rate, cost-equity ratio and use of in-and-out trading. Excessive activity could violate quantitative suitability standards.
There is an institutional investor exemption under FINRA Rule 2111(b) which states that, for institutional customers, the brokerage firm or stockbroker must have a reasonable basis to believe the customer is capable of independently assessing the investment risks of the particular investment strategy being recommended. Additionally, the institutional customer must confirm that it is indeed exercising independent judgment in evaluating the recommendation.
Schedule a Free Consultation with a Securities Lawyer to Evaluate Your Unsuitable Investment Claim
If a stockbroker, financial advisor, or their brokerage firm violated the FINRA suitability rule, they can be held liable for the losses that their clients suffer as a result of the unsuitable investment recommendation. As a result, investors who lost money as a result of unsuitable investments may be able to recover their investment losses through FINRA arbitration.
If you are have suffered losses from an unsuitable investment recommendation made by your stockbroker, financial advisor, or brokerage firm, you may be able to recover your losses through FINRA arbitration. Please call Kons Law Firm at (860) 920-5181 for a FREE, NO OBLIGATION consultation to discuss your investment loss recovery options.
Kons Law Firm represents investors nationwide in securities arbitration and litigation matters. To learn more about the Firm’s securities litigation and FINRA arbitration practice, please visit www.investmentlossattorney.com.