Suitability Supervision

The Financial Industry Regulatory Authority (FINRA) judges all sales recommendations based upon whether the sale meets the ethical standards of the industry. Brokerage firms are required to supervise the suitability of their broker’s investment recommendations.

FINRA’s suitability rule requires that all brokers must have a reasonable basis to believe that the recommendation is suitable for at least some investors. Regardless of the specific product or investment strategy being recommended, brokers must convey the risks and rewards associated with the recommended security or strategy before bringing it to an investor’s attention. In addition, all brokers must have a reasonable basis to believe that the recommended investment strategy is suitable for the particular customer. The broker must take into account the investor’s risk tolerance, investment objectives, age, financial circumstances, other investment holdings, and experience in making the investment recommendation.

In exercising a brokerage firm’s supervision duties the firm must put in place and implement a supervisory procedure designed to reasonably ensure compliance with the suitability rule. Such a system often includes periodic reviews of a broker’s investment recommendations for potential red flags indicating potential misconduct. Brokerage firms should also ensure that an investor’s concentration in a particular security or type of security is reasonable in light of the investor investment objectives and risk tolerance.

Evidence that all or many of the broker’s clients are invested in the same products or concentrated in particular securities may reveal that the broker has failed to tailor their investment recommendations to each individual client’s needs. Often times a broker that recommends the same investment in nearly all client accounts is not taking into account each client’s financial objectives and would be considered a “red flag.” Finally, it is prudent for a brokerage firm that employs a broker with a history of suitability complaints to be placed under heightened supervision to ensure the broker’s compliance with the securities laws.