FINRA's suitability rule
Your broker must have a reasonable basis for believing that the recommendation is suitable for youWhen your broker recommends that you buy or sell a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your income and net worth, investment objectives, risk tolerance, and other security holdings.
The major securities industry self-regulatory organizations have suitability rules. You'll find FINRA's suitability rule and links to other FINRA materials concerning suitability in the FINRA Manual on FINRA's website. If you believe your broker made unsuitable recommendations or engaged in another sales practice abuse, please send us your complaint
Giving advice about securitiesThe term Registered Investment Adviser (RIA) is used to describe an Investment Adviser who is registered with the Securities and Exchange Commission or a state's securities agency. The term has been popularized due to its use within the Investment Advisers Act of 1940 and its association to the term "Investment Advisor" (IA) (spelled "Investment Adviser" in U.S. financial law). An IA is defined by the Securities and Exchange Commission as an individual or a firm that is in the business of giving advice about securities.
Individuals or firms that receive compensation for giving advice on investing in securities such as stocks, bonds, mutual funds, or exchange traded funds are deemed to be investment advisers. It is also common for investment advisers to manage portfolios of securities. RIAs generally are paid in any of the following ways: a percentage of the value of the assets they manage for clients, an hourly fee, fixed fee, a commission on the securities they sell
Business of providing investment adviceRRs of a Broker-Dealer who also engage in the business of providing investment advice are required to affiliate with a Registered Investment Adviser. As Investment Adviser Representatives (IARs) they are held to the "Fiduciary Standard" as defined under the US Investment Advisers Act of 1940 when providing investment advice to clients. This requires the dually registered Financial Advisors recommending a security to clearly communicate to their clients whether they are brokering a suitable security as a RR or providing investment advice as an IAR and therefore acting as a fiduciaryState Registered Investment Advisers
In general, RIAs managing assets totaling less than $100 million must register with the state securities agency in the state where they have their principal place of business.
Federally Registered Investment Advisers
In general, RIAs who manage $100 million or more in client assets must register with the US Securities and Exchange Commission (SEC).
Know your customer rulesIn 2012, suitability and "know your customer" rules will expand with FINRA rule 2111. This rule will effectively expand liability for recommendations of strategy. Over the years, investment advisors have been taught to know the customer's suitability, objectives, time horizon and risk tolerance, and to limit speculative or aggressive recommendations based on information from the customer. With the new rule 2111, brokers may be liable for their product and service recommendations which are part of a strategy. A strategy could include tax, retirement, investments, funds, or even estate planning. Therefore, a registered advisor may want to make better use of CPA advice or licensed attorneys. "New FINRA Rule 2111 generally is modeled after former NASD Rule 2310 (Suitability) and requires that a firm or associated person "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the i
The anti-fraud provisionsThe anti-fraud provisions of the Investment Advisers Act of 1940 and most state laws impose a duty on IAs to act as fiduciaries in dealings with their clients. This means the adviser must hold the client's interest above its own in all matters. The Securities and Exchange Commission (SEC) has said that an adviser has a duty to:
Make reasonable investment recommendations independent of outside influencesIAs generally are paid in one of the following ways:
A percentage of the value of the assets they manage
An hourly fee for the time they spend working
A fixed fee
Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer.
Make recommendations based on a reasonable inquiry into a client's investment objectives, financial situation and other factors
Always place client interests ahead of its own.
Suitability cases led to the fourth largest amount of fines for the regulatorsuitability cases led to the fourth largest amount of fines for the regulator in 2011.1 FINRA reported $7.7 million in fines from 106 cases involving alleged suitability violations in 2011.2 Although suitability has consistently landed on the Top Enforcement Issues list (second in 2008 and 2009; fourth in 2010 and 2011), 2011 saw a record number of suitability cases. The 106 suitability cases reported in 2011 doubled the 53 that FINRA announced in 2009 and 2010. This Sutherland FINRA Focus dives deeper into the regulator's recent enforcement actions and examines a few of the key 2011 suitability cases.
FINRA announced last week that is has fined Wachovia Securities and Wachovia Securities Financial Network more than $4.5 million for suitability and other violations relating to the sales of mutual funds and Unit Investment Trusts (UITs).
Fines of $4.5 million for suitability and other violations relating to the sales of mutual fundsIn on case FINRA announced last it fined Wachovia Securities and Wachovia Securities Financial Network more than $4.5 million for suitability and other violations relating to the sales of mutual funds and Unit Investment Trusts (UITs).
According to the FINRA release, "Wachovia Securities and made unsuitable sales of Class B and C shares and Wachovia Securities Financial Network made unsuitable sales of Class B shares." Wachovia Securities recommended the purchase of B and C Class shares, and Wachovia Securities Financial Network recommended the purchase of B shares, without considering, on a consistent basis, that for certain customers, an equal investment in Class A shares would have been more appropriate.In its announcement, Susan L. Merrill, FINRA's Executive Vice President and Chief of Enforcement reiterated the duty of funds and brokers to consider suitability when recommending securities:
"Firms must consider all relevant factors when recommending securities,"
Risky or speculative investmentsWhen a broker recommends the purchase of securities that are overly, risky or speculative in light of that person's stated investment objective, expressed tolerance for risk, or overall financial condition, or generally, based upon their age, income, education, prior investment experience and the existence or non-existence of other assets, that person may have a claim for the sale of unsuitable securities.
The sale of unsuitable investments is actionable under Rule 10(b) of the Securities and Exchange Act of 1934, SEC Rule 10b-5. This body of law is premised, in part, on the New York Stock Exchange Rule 405- "Know Your Customer" rule,claim for"suitability," or the sale of unsuitable investments arises under Section 10 (b) of the Exchange Act of 1934, and Rule 10b-5, as promulgated thereunder by the SEC, as a "misstatement or omission of material fact in connection with the sale of securities," (i.e. fraud by omission), in that the broker recommended a particular security
FINRA arbitrationin the majority of cases, the investor will only have an opportunity to recover his or her losses, if a FINRA arbitration is filed. Consequently, investors should read the information contained herein, which has been released and published by FINRA, to see if they suffered damages as a result of any of these activitys. You Can bring actions against Stockbrokers and Investment Advisors If They Did Not Recommend Suitable Investments to You. if this has happened to you do somthing
Additional resources provided by the author
- Howard Roitman Assoc
- "Selling away" cases
- Business Disputes
- Family Trustees and Independent Trustees
- Investment fraud arbitrations FINRA Motions
- Arbitration awards with glaring errors are not appelable
- Nevada claim for breach of fiduciary duty
- Suing Your Investment Advisor for Bad Advice
- Howard Roitman on Avvo