Unsuitability in Securities Transactions

Unsuitability is one of the most common claims filed against broker-dealers by their customers. 

The suitability doctrines under the federal securities laws demand a broker only recommend to investors securities that are peculiar to the investor’s objective and needs.

What Is Unsuitability?

Unsuitability may be broadly defined as inappropriate recommendations and investments inconsistent with an investor’s goals and profile.

The FINRA Rule 2111 requires a brokerage firm or associated person to have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities suits the customer. This is based on the information obtained through the reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.

The three main suitability obligations for brokerage firms and brokers include:

  • Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.  Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.
  • Customer-specific suitability requires that a broker, based on a particular customer’s investment profile, has a reasonable basis to believe that the recommendation is suitable for that customer. The broker must attempt to obtain and analyze a broad array of customer-specific factors to support this determination.
  • Quantitative suitability requires a broker with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.

How Does Unsuitability Happen?

Brokerage firms are required to understand customers so that they can provide a peculiar service that best suits their needs.

When a broker gets a new client, an application process is conducted to obtain the customer’s vitals.

These vitals are expected to be assessed to understand the investor and what they are trying to achieve by investing.

A customer’s investment profile can be assessed based on the following;

  • Age 
  • Financial situation and needs 
  • Tax status 
  • Investment objectives 
  • Investment experience 
  • Risk tolerance

It’s the duty of the broker to recommend a portfolio that reflects the investor’s profile and preferences. This, however, must be done in line with the suitability principles and fiduciary duties.

When the broker fails to do this, deliberately or through ignorance, the issue of unsuitability arises.

Before hiring a broker, use BrokerCheck by FINRA to know if they are usually accused of unsuitability.

How Do I Sue My Broker for Unsuitability?

Many a time, it is impossible for an investor to sue their financial advisor or stockbroker for unsuitability. This does not mean that you cannot get compensation for your investment loss.

A lot of brokerage firms usually include “arbitration clauses” in their contract with clients. These clauses mandate you resolve all disputes via a FINRA arbitration.

Get a Free Unsuitability Consultation

Unsuitability is not solely a result of recommending unsuitable stocks or bonds; your broker’s investment strategy may also be unsuitable for your portfolio.

Here at S.A. Law Group, our securities lawyers, have years of experience helping clients who suffered investment loss due to unsuitability. Get in touch today for a free consultation.

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