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Unsuitability

Securities Lawyers Offering Vigorous Advocacy to Investors

People invest for various reasons, depending on their personal circumstances. Often, younger people choose to take greater investment risks. Elderly people may not be interested in risky investments and may simply want to maintain what they have. Broker-dealers should know their clients and their reasons for investing. A failure to make appropriate recommendations can give rise to an investor’s unsuitability claim. If you need to bring an unsuitability claim, you should consult the securities attorneys at Varbero Casagrande.

Unsuitability

If you open an account with an investment firm or with a broker-dealer, your broker will owe you a duty to recommend securities, investments, and investment strategies that are suitable, based on your investment profile. After you open an account, you are required to complete an account opening form to set forth important information about yourself, including your investment goals, your timeframe for achieving them, your tolerance for risk, your financial profile, your net worth, your income, and your job. All this information should go toward letting your broker-dealer’s registered representatives know about your risk tolerance, financial profile, investment timeline, and other investment goals.

Under FINRA Rule 2111, all member organizations need to use due diligence to figure out critical facts related to each customer and order. Broker-dealers are supposed to know key information about their clients, as well as their clients’ reasons for investing, so that they can provide recommendations that are suitable. Factors that a broker should consider include the investor’s risk tolerance, their knowledge and experience as an investor, and the objectives and preferences of the investor. It may be possible to claim stockbroker misconduct under Rule 2111 when an investment recommendation is unsuitable.

FINRA Rule 2111 and Rule 2090

The Financial Industry Regulatory Authority, Inc. (FINRA) has rules requiring that all investment recommendations be suitable for customers. Under FINRA Rule 2111, a member of FINRA must have a reasonable basis to believe that a recommended investment strategy or investment involving a security is suitable for a customer, based on information gotten through the member’s reasonable diligence. The profile of the customer that must be considered includes information about the customer’s age, financial condition, investment goals, investment experience, tax status, timeframe, liquidity needs, tolerance for risk, and anything else that is disclosed to obtain a recommendation.

Under Rule 2111, a broker needs to have a reasonable basis to think, based on their reasonable diligence, that a recommendation is suitable for a minimum of some investors. The broker must have used reasonable diligence to understand the potential risks and rewards of a certain strategy or security. The broker also needs to have a reasonable basis, due to a specific customer’s investment profile, to think that the recommendation is suitable for the customer. The broker needs to try to obtain and analyze a wide range of customer-specific factors to bolster this determination. A broker with control over a customer’s account needs to possess reasonable grounds for thinking that a series of recommended transactions is suitable and not excessive, in view of the investment profile of the customer.

Additionally, a broker needs to follow Rule 2090. Under this rule, each member is supposed to use reasonable diligence in maintaining accounts. Investments may not be suitable when a customer does not have the financial ability to take on a risk. For example, oil and gas stocks are volatile, so they may be unsuitable for an elderly person with limited savings. As an additional example, for a new type of stock, a customer may not understand the risk associated with the investment, and this can result in losses that were not anticipated. When a broker breaches their duty to recommend a suitable security or investment strategy, they can be liable for the damages incurred.

Hire an Experienced Securities Lawyer to Bring an Unsuitability Claim

If you need to bring an unsuitability claim against a broker or firm, you should consult Varbero Casagrande. Our attorneys represent investors nationwide. We have accumulated significant experience in securities arbitration. Call our New York Office at: (646) 378-4400, or our Florida Office at: (954) 998-7910 or contact us online for a case evaluation by an attorney.

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