As we’ve explained repeatedly on this site, every recommendation made or sales strategy employed by a brokerage firm or broker on behalf of a customer must be suitable for that customer. An unsuitable recommendation or strategy can leave the firm or broker civilly liable if the customer incurs damages.
FINRA recently issued Regulatory Notice 13-31 concerning effective practices for firms seeking to comply with the suitability rule. We thought this provided a good opportunity to again remind our readers what the suitability rule requires of every brokerage firm and broker (referred to by FINRA as “firm” and “associated person.”) The “Background” section of Regulatory Notice 13-31 contains this explanation of suitability obligations:
The rule requires a firm or associated person to “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 information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.” Firms and associated persons generally must attempt to obtain and analyze customer-specific information—such as customer’s age, investment experience, time horizon, liquidity needs and risk tolerance—when making recommendations to customers.
The rule also recites the three main suitability obligations:
Reasonable Basis
Requires a firm or associated person to perform reasonable diligence to understand the nature of a recommended security or investment strategy involving a security, as well as its potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding.
Customer Specific
Requires a firm or associated person to have a reasonable basis to believe that a recommendation is suitable for a particular customer based on that customer’s investment profile.
Quantitative
Requires a firm or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive.
The rule added: recommended investment strategies involving a security or securities, including explicit recommendations to “hold” a security or securities.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA with over 20 years of representing individuals who have lost money due to the negligence of investors and brokers.
Hugh is a past President of the Public Investors Arbitration Bar Association (PIABA), an international legal association composed of practitioners who represent investors in disputes with the securities industry. He was also just re-elected to PIABA’s Board of Directors, where he has served as a director since 2011.
