Articles Posted in Suitability

Published on:

Every brokerage firm, investment advisor, and broker is required by securities rules to “know their customer,” so they can make appropriate recommendations given the investor’s age, net worth, risk tolerance and goals.

FINRA Rule 2111 also known as the “Suitability Rule” requires that firms and their brokers have a reasonable basis to believe that each securities transaction they recommend is suitable for the investor. This rule is based on the fundamental requirement that all FINRA firms and their brokers deal fairly with their customers.

Before any investment advice is given, firms and their associated persons have an obligation under the Suitability Rule to obtain as much information as possible about each investor’s particular financial situation and needs. Firms are required to request the information, but investors are not required to provide all of the information requested. The more information the firms and brokers have about any given customer, the more likely the firms will be to provide suitable investment advice to that customer.

Published on:

The SEC and FINRA have issued an investor alert to educate investors about the risks of structured notes with principal protection. These products, notwithstanding their names, have substantial risks.

Structured notes with principal protection have a zero-coupon bond – which pays no interest until the bond matures — with an option or other derivative product with a payoff connected to a certain index, asset, index or benchmark. The underlying index, asset, or benchmark may vary from currencies, commodities and spreads between interest rates.

The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. But the investor needs to know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Published on:

NFL players are finding themselves abused by brokers with bad investments in Ponzi and other fraudulent schemes.

Hall of Fame Quarterback, John Elway, recently disclosed that he and his partner gave $15 million to a hedge fund manager, who was allegedly running a Ponzi scheme.

New Orleans Saint, Alex Brown, sued his financial advisors over $3.9 million in losses, alleging they had “abused the trust,” including bad investments in airplane hangars.

Published on:

Though the Securities and Exchange Commission have yet to set a universal standard of care for brokers and investment advisers, one thing is certain: Investors want a single standard.

Out of 1,319 investors polled, over 90% of investors want a broker and investment adviser to have and follow the same fiduciary duty and investor protection rules, according to a survey released on September 15 by the Opinion Research Corp./Infogroup. In addition, 97% believe that financial professionals should put investor interests ahead of their own, and be forced to disclose fees and conflicts of interest, similar to what investment advisers are required to do.

The survey also revealed that over half of investors do now know the different standards of care that certain advisers must meet. And at least 60% of those surveyed responded that they assume that insurance agents and stockbrokers are already held to a fiduciary duty. This assumption is wrong, as brokers only have to satisfy a suitability requirement, i.e., investments must meet a client’s investment objectives, risk tolerance and time horizon.

Published on:

Raymond James & Associates, Inc., and one of the brokerage’s advisers must pay $925,000 in damages to a Texas couple that purchased auction rate securities in 2008, a securities industry regulatory panel has ruled.

The Financial Industry Regulatory Authority panel awarded the damages to Rex and Sherese Glendenning, a Texas couple that originally sought $1.4 million in compensatory damages.

The Glendennings opened their account with Raymond James in January 2008, just prior to when the market for the securities collapsed. Milton recommended and invested their money in an auction rate security consisting of sewer revenue bonds, without disclosing the inherent risk that the auctions might fail, a case summary said.

Published on:

FINRA recently issued a regulatory notice on Private Placements, reminding broker-dealers of their duty to conduct reasonable investigations in recommending investments in Regulation D offerings.

The notice provides that any broker-dealer recommending securities under Regulation D must the suitability requirement under NASD Rule 2310 and must comply with the advertising and supervisory rules of FINRA and the SEC.

FINRA has found problems in recent examinations and investigations, including sales and fraud practice abuses in Regulation D offerings. FINRA noted that a broker-dealer’s customer may be sophisticated does not obviate the duty to investigate.