A broker must always make investment recommendations that are consistent with the client’s needs, objectives, and risk tolerance. FINRA requires brokerage firms and their employees – financial advisors, stockbrokers, or financial consultants – to always recommend suitable investments and treat their customers fairly. FINRA Rule 2111 tackles this issue. Known as the suitability rule, firms and their associates must have a “reasonable basis” to think a securities investment or strategy is suitable for their clients. They must base this belief by diligently studying a client’s investment profile and understanding the investment or strategy they are recommending.
Firms must obtain information on a customer’s:
- Other investments
- Financial situation
- Tax Status
- Experience investing
- Expect investment time horizon
- Risk tolerance
Basically, brokers must learn as much about their client profiles as possible before recommending an investment strategy or securities transaction. Deviating from this rule can mean unnecessary losses on the investor’s part. A broker’s main priority should be to benefit his or her clients – acting in accordance with knowledge gained from studying a client’s profile. A broker who acts otherwise, recklessly placing a client’s securities in an unsuitable investment, may be guilty of fraud and subject to arbitration.
What Constitutes Unsuitable Investments?
Just because an investment results in losses doesn’t mean it was unsuitable. While no investor enjoys losing money, stock market and investment fluctuations do happen. There are instances, however, when a loss is the result of a broker’s carelessness or willful intent to harm. Learning the difference between an honest loss and an avoidable one requires understanding the definition of “unsuitable investments.” An unsuitable investment is one in which:
- The client cannot assume the level of risk.
- Is inconsistent with client’s risk tolerance.
- The client didn’t understand the risks associated with the investment.
An unsuitable investment may have one or all three of these traits. Brokers have a duty to know their clients and only give suitable financial advice and recommend suitable investments and trading strategies. Failure to understand the client’s profile, failure to understand the investment being recommended, mismanaging a portfolio, carelessly failing to inform a client about the risks of an investment, or fraudulently deceiving a client make up the beginnings of an unsuitable investment. Any of these actions breaches a broker’s duty to his or her clients. Losses a client sustains because of this breach may be eligible for recovery through a Financial Industry Regulatory Authority (FINRA) arbitration claim.
What is FINRA Arbitration?
The Financial Industry Regulatory Authority plays a critical role in the U.S. financial system. It protects investors and the integrity of the stock market by regulating the securities industry. FINRA is an independent organization, not part of the government. Congress authorizes this not-for-profit organization to protect investors by ensuring the industry operates honestly and fairly.
FINRA has established rules that govern the activities of the thousands of brokerage firms and brokers throughout the country, but they have global repercussions. Periodically, FINRA examines firms for compliance with the rules, keeping the market transparent. If necessary, FINRA will bring disciplinary actions against firms and brokers who break the rules. However, investors looking for restitution will need an experienced law firm like one of the Daniel J. Miller.
For resolution of disputes among investors, firms and brokers, securities fraud victims must initiate arbitration through FINRA. The arbitration process starts with one party filing a Statement of Claim with FINRA. The statement of claim must describe the dispute, name the parties involved, and demand an amount of money in restitution. Like a court case, the broker and/or the brokerage firm responds to the allegations in an answer documents are exchanged in discovery and a final hearing (trial) date is set.
Hire an Experienced Arbitration Attorney
If a broker put your securities in an unsuitable investment, resulting in major losses, you may be able to recover some or all of your money. With help from Daniel, you improve your chances of going up against a brokerage firm or careless individual broker. Miller Stern lawyers, LLC has what it takes to help clients file a claim with FINRA, select a panel to hear a case, resolve preliminary issues, and conduct a FINRA final hearing or trial. Our skill in aggressive securities fraud litigation may help you recover investment losses.
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