A broker or brokerage firm can be liable to you for the losses you sustain if the securities they recommend are too aggressive or otherwise unsuitable for you. A broker and a brokerage firm have a duty to recommend only “suitable” investments for a customer. A suitable recommendation is one that takes into consideration the investor’s individual situation, including the investor’s financial needs and tolerance for risk. By contrast, a recommendation that is unsuitable is one that fails to be appropriate for an individual investor given their specific situation and tolerance for risk.
The Financial Industry Regulatory Authority (FINRA) has rules implementing the Suitability Standard for Recommendations, also called the Suitability Rule.
NASD Conduct Rule 2310: Recommendations to Customers (Suitability)
- In recommending to a customer the purchase, sale, or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.
- Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:
- The customer’s financial status
- The customer’s tax status
- The customer’s investment objectives
- Such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer
The NYSE has codified its “Know Your Customer Rule” as Rule 405, Diligence as to Accounts, which provides:
- Every member organization is required to:
“Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization.”
If you believe that you have been a victim of an unsuitable securities recommendation or any type of securities fraud, you have certain rights which you should be aware of, rights which may provide you an opportunity to recover your losses from your stockbroker or brokerage firm.