Fighting for Investors
Prior to recommending the purchase of specific investments or a specific investment strategy to a customer, a stockbroker / financial advisor is required to determine that the investments are suitable to that particular investor. A suitability determination is based upon many different factors such as age, investment objectives, risk tolerance, employment situation, needs, income, assets, and investment experience. If an advisor's recommendations of unsuitable investments result in the investor incurring significant losses, that investor may have a suitability claim against the broker and his/her firm.
This "suitability" requirement has in large part been superseded by the SEC's Regulation Best Interest (Reg BI) in 2020 which requires that FINRA advisors only make recommendations of securities or investment strategies that are in the customer's best interest.
If your broker or advisor has recommended investments to you that you believe were unsuitable for you, you should contact one of our attorneys as soon as possible.
A FINRA financial advisor's duty to recommend suitable investments and strategies is mandated by the FINRA Suitability Rule 2111.
FINRA Rule 2111 was adopted in 2012 to update Suitability obligations, including specifically referring to investment strategies. The Rule requires that FINRA registered financial advisors must have a reasonable basis to believe that any investments or strategies that they recommend are suitable for the customer to whom they are making the recommendation. The explicit factors that the rule requires the advisor to consider in this suitability analysis are "the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance…" The advisor is also required to consider other relevant information provided by the customer during this suitability analysis.
A "recommendation" has been further defined by the NASD (now FINRA) in NASD Notice to Members 96-60 to include "…when the member or its associated person brings a specific security to the attention of the customer through any means…"
Notably, an advisor must consider the present concentration of a particular security in an account before recommending buying more of the same security or type of security. For example, a security that may be suitable at a certain percentage of an account can become unsuitable at a higher percentage, sometimes referred to as overconcentration.
A broker's / advisor's and firm's suitability duties include both customer specific suitability as well as reasonable basis suitability. Reasonable basis suitability requires that the broker/firm understand the investment or strategy they are recommending, including the risks involved in that investment or strategy. Specifically, FINRA Rule 2111's supplementary material .05 requires that this "reasonable basis" due diligence be carried out, and further states: "The lack of such an understanding when recommending a security or strategy violates the suitability rule."
A broker's failure to understand the risks of a security or strategy (and thus a violation of reasonable basis suitability) can arise in many different scenarios including complex options strategies, closed end mutual funds, REITs, variable annuities, investments that turn out to be ponzi schemes, and private placements.
Some financial advisors are not registered with FINRA, but instead are SEC or state registered investment advisors (RIAs). Although FINRA Rules may not specifically apply to them, they owe fiduciary duties to their customers which would include recommending suitable investments to their customers.
Most of the hundreds of FINRA arbitration customer claims Greco & Greco's attorneys have filed over the years have involved some aspect of unsuitable recommendations. If you believe that your stockbroker / financial advisor or brokerage firm has recommended stocks, bonds, funds, private placements, REITs, or other investments or strategies to you that were not suitable for your financial situation and risk tolerance, please contact Scott Greco for a free attorney consultation.
Our Virginia securities fraud lawyers represent individuals from all states across the country and have decades of experience protecting the rights of customers, and holding securities firms responsible for the acts of their brokers.