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Unsuitable Investment Advice

Brokerage firms and its representatives are required to only recommend suitable investments to their customers. Unsuitable advice is a violation of the “know-your-customer” FINRA Rule 2090 and “suitability” FINRA Rule 2111.

Know Your Customer (FINRA Rule 2090)

The “know-your-customer” rule begins with the opening of the customer account and the requirement to ascertain through “reasonable due diligence” the determination of all “essential facts” concerning every customer of the brokerage firm. The essential facts are those required to:

  • effectively service a customer’s account;
  • act in accordance with special instructions;
  • authority to act on behalf of account holder;
  • comply with industry laws, rules and regulations.

The “know-your-customer” obligation does not depend on whether a financial advisor has made a recommendation.

Suitability (FINRA Rule 2111)

The “suitability” rule requires that brokerage firms and its representatives have a “reasonable basis” to believe that a recommended investment or investment strategy is suitable based on a customer’s investment profile. The rule requires “reasonable diligence” to ascertain information concerning a customer’s investment profile, including:

  • age;
  • other investments;
  • employment status;
  • tax status;
  • investment objectives;
  • financial situation and needs;
  • investment experience;
  • investment time horizon;
  • liquidity needs;
  • risk tolerance, and
  • any other information disclosed by customer in connection with recommendation.

The suitability rules rely upon a financial advisor’s investment recommendation (buy, sell or hold) as the triggering event for application of the rule. The rule applies a flexible approach to the “facts and circumstance” of a particular customer recommendation. A recommendation does not rely upon a transaction or the generation of compensation for its existence. A recommendation can result from financial advisor communication directed to facilitate a transaction or refrain from any transactions regarding a security or investment strategy in a customer account. The financial advisor must have a firm understanding of both the investment and the customer. Failure to understand both aspects is considered a violation of the rule.

The customer information profile includes an expanded list of types of information required for consideration when a suitability determination is made about an investment recommendation. To strengthen the rules that require the suitability analysis, brokerage firms and its representatives are required to indicate with “specificity” the reasonable basis for why a particular customer information profile factor is not relevant, in order to be relieved of the obligation to seek the required information.

The Silver Law Group can help you determine whether an investment loss is the result of unsuitable investment advice. If an investor suffers losses as a result of unsuitable investment advice they may be able recover their losses in a FINRA arbitration claim.

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