One of the main claims in any securities fraud case has to do with suitability (i.e. were the investments recommended to the customer appropriate in light of the customer’s age, investment experience, investment objectives, etc.). The following is a brief breakdown of the FINRA Rules applicable to suitability.
FINRA Rule 2111
Rule 2111 adopts past SEC and FINRA guidance by applying suitability obligations not only to recommended securities transactions, but also to recommended investment strategies involving a security or securities. The rule (like the former NASD rule) hinges a suitability obligation on whether a broker-dealer or associated person makes a recommendation. The rule codifies three separate suitability obligations:
(1) Reasonable Basis – firms must have a reasonable basis to believe, based on adequate due diligence, that a recommendation is suitable at least for some investors;
(2) Customer Specific – firms must have reasonable grounds to believe a recommendation is suitable for the specific investor; and
(3) Quantitative – firms must have a reasonable basis to believe the number of recommended transactions within a certain period is not excessive (i.e., that the investor’s account is not being churned).
FINRA Rule 2111 also requires a broker-dealer or associated person to make reasonable efforts to gather additional information concerning a customer’s age, investment experience, investment time horizon, liquidity needs and risk tolerance. A firm must determine the suitability of the investment for the customer based on all information (not just the required data) that is known to the firm or associated person.
Rule 2111 also touches on the concept of churning (or excessive trading). According to the Rule, for the doctrine of churning to apply, it requires that a registered representative have actual or de facto control over a client’s account. Additionally, the churning interpretation provides that, even if individual transactions for such an account may appear suitable viewed in isolation, a series of such transactions must not be excessive and unsuitable in view of the customer’s profile. The interpretative material indicates that no single factor is dispositive with respect to excessiveness, but states that turnover rate, cost-equity ratio and use of in-and-out trading all may be probative factors.
FINRA Rule 2090 – Know-Your-Customer
The suitability analysis also requires a duty of the financial advisor to “know its customer.” FINRA Rule 2090 requires firms to know and retain the “essential facts” about every customer and concerning the authority of any person acting on behalf of the customer. “Essential facts” for these purposes include the customer’s financial profile and investment objectives or policy.
If you believe that your financial advisor has sold you unsuitable investments, you may have claims to recover your damages resulting from those recommendations. To speak with a FINRA securities arbitration attorney, please contact The White Law Group’s Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, please visit the firm’s website at http://www.whitesecuritieslaw.com.