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Stockbroker Arbitration: FINRA Clarifies Suitability Rule

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New York, NYOne of the key principles of investment advice is that recommended investments must be suitable for the investor based on the investor's age, financial situation and other factors. Unsuitability of investments is a main claim at stockbroker arbitration when investors attempt to recover funds lost to unsuitable investments. Now, the Financial Industry Regulatory Authority (FINRA) has issued a clarification on the suitability rule, making it more difficult for some people to file an arbitration for stockbroker fraud. Despite the clarification, investors who meet certain criteria will still be able to fine a stockbroker arbitration claim for unsuitability of investments.

Suitability violations occur when a stockbroker or financial advisor recommends investments that are not appropriate for the investor's risk tolerance, investment goals or financial situation. There are many factors that determine an investor's risk tolerance, including age, income and investment experience. Simply put, a teacher who is 65-years-old and about to retire will have a different risk tolerance than a 34-year-old attorney. As such, different investment vehicles will be considered suitable for the 65-year-old than the 34-year-old.

If the investment advisor recommends highly risky investments for the 65-year-old, and the account loses money, the investor could file a FINRA arbitration, alleging the investment advisor made recommendations that were unsuitable. In other words, the broker must have a reasonable belief that any securities or investments he recommends are suitable for the investor, based on the investment profile.

According to Investment News (12/16/12) FINRA has now clarified who can file a suitability claim under rule 2111. In May 2012, FINRA issued guidance that opened the door to people who were not technically customers of the advisor to file a suitability claim. In other words, if an acquaintance approached the advisor at a party and the advisor mentioned an investment vehicle during a chat, the investor could have filed a complaint if he invested in that vehicle and lost money. Any advice given, even if informal or given to a potential investor, would have been covered by suitability regulations.

In December 2012, however, FINRA clarified its position, saying people who were not actually customers of the broker--that is they did not either open an account with the brokerage or buy a product that the firm receives compensation for--could not file a suitability claim.

This means an investor must either be a client of the brokerage firm or have at least purchased a product the brokerage receives compensation for to file a FINRA suitability claim.


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