Securities Arbitration

Brokers’ and brokerage firms’ duty to recommend suitable investment products and investment strategies is a critical obligation owed to their investment customers.  Essentially, this duty requires that brokers know their customers before recommending investment products and strategies and only recommend what is suitable based on that knowledge.  Investors work their entire careers to build savings that they entrust to their brokers, and brokers investing their customers in unsuitable investments or strategies can be disastrous to the investor’s financial well-being. 

Several securities laws and rules establish financial industry standards of care that require brokers to recommend only suitable investments and strategies.  This includes states’ Blue Sky laws and FINRA Rule 2111, referred to as the “Suitability Rule.”  Brokers are required to register with FINRA and follow FINRA’s rules.  FINRA Rule 2111 requires brokers to obtain customer profiles that include a customer’s

• age,
• other investments,
• financial situation and needs,
• tax status,
• investment objectives,
• investment experience,
• investment time horizon,
• liquidity needs, and
• risk tolerance.

It also requires brokers to ensure products and strategies are suitable on three grounds.  One, brokers must have a “reasonable basis” to believe an investment “could be suitable for at least some investors.”  In other words, some investments and strategies are so flawed that they are unsuitable for anyone.  Two, brokers must ensure “quantitative suitability,” which requires a series of transactions to be suitable.  This prohibits brokers from excessively trading in a customer’s account.  Three, brokers must ensure “customer-specific” suitability, which requires investment product and strategy recommendations be suitable for customers based on their investment profiles.  Claims for violating suitability standards set by the applicable rules can be based on common law grounds such as negligence or a breach of fiduciary duty.

Common suitability claims involve brokers recommending overly risky products, such as promissory notes, oil and gas funds, or private placements, which are not registered with the Securities Exchange Commission (“SEC”) or state securities regulators.  Other examples include recommending illiquid, expensive securities with expirations far into the future that are unsuitable to a person based on their age and need for steady income, such as certain annuity products.  Some products and strategies—like options, commodities, margin accounts, managed futures funds, and speculative stocks—may be appropriate for experienced investors, but highly unsuitable for most others.

If you believe you have lost money due to unsuitable investment products or strategies recommended to you by your broker, contact Marquardt Law Office LLC for a free evaluation of your claim and to discuss your options for pursuing a recovery.