Unsuitability and Misrepresentation

Two issues that investors should be aware of are unsuitability and misrepresentation. While these issues are different, they both involve an investment broker not acting in the best interests of the investor. The Financial Industry Regulatory Authority (FINRA) has specifically warned investors to be aware of unsuitability and misrepresentation.

Unsuitability occurs when a broker recommends an investment that does not coincide with the investor’s objectives, financial situation, or level of risk tolerance. An example of this is when a broker recommends a high risk security when the investor made it clear that he or she is on a fixed budget with low risk tolerance.

Under FINRA Rule 2111, a member or associated person must have a reasonable basis to believe that the recommended transaction or investment strategy involving a security is suitable for the investor, based on information gained through reasonable diligence to ascertain the investor’s investment profile. A person’s investment profile includes the following information about the investor:

1. Age;
2. Financial situation and needs;
3. Other investments;
4. Tax status;
5. Investment objectives;
6. Investment experience;
7. Investment time horizon;
8. Need for the ability to liquidate assets;
9. Risk tolerance; and
10. Any other information disclosed by the investor.

A broker cannot intentionally or fraudulently misrepresent a material fact or omit material information related to a security. An action to recover for misrepresentation may arise if the investor relies on the advice of the broker. Misrepresentation may occur as a result of the following:

1. Conducting inadequate due diligence concerning a security offering;
2. Failing to disclose all material facts;
3. Failing to disclose all costs related to a security; or
4. Providing unrealistic assumptions in relation to investment projections.

Misrepresentation often occurs when dealing with risky or volatile securities in an attempt to conceal the negative aspects of the security. Unfortunately, an investor may not become aware of the misrepresentation until after money is lost.

There are several ways to obtain relief if you are the victim of unsuitability or misrepresentation. A common method is to file a claim with FINRA and have the issue resolved through arbitration or mediation. Under arbitration, an independent third-party resolves the dispute between the parties with a ruling that is final and binding.

Alternatively, an investor and broker can use mediation, which involves an attempt to negotiate to find a solution to the issue. Similarly to arbitration, a third-party is used (called the mediator), though this person does not make a ruling on the issue. Instead, the mediator helps to facilitate the negotiation. Importantly, as long as a settlement agreement has not been signed, either party can choose to end mediation at any time and pursue other options, such as arbitration or the traditional court system.

If you believe that you have been harmed by an investment broker misrepresenting or providing unsuitable securities, contact the Silver Law Group. We have extensive experience in helping investors pursue remedies for harm suffered as a result of investment brokerage firms, including through FINRA arbitration.