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New FINRA Suitability Rule Imposes An Obligation To Conduct A Suitability Determination For Sophisticated and Wealthy Investors

The new FINRA Suitability Rule – FINRA Rule 2111 – requires that broker-dealers and associated persons make recommendations to customers for securities that the firm and broker reasonably believe are suitable for the customer. This new rule imposes an obligation to conduct a customer specific suitability analysis for all customers, even those investors who are sophisticated and wealthy. The Securities and Exchange Commission (“SEC”) has held that a broker must still consider the customer’s investment objectives and risk tolerance when making securities recommendations to a sophisticated customer. See In the matter of Dale E. Frey, Roger A. Rawlings, and William C. Piontek, Initial Decision Release No. 221, 2003 WL 245560 (February 5, 2003). Furthermore, the SEC has held that being a wealthy customer does not provide a basis for recommending risky investments. See Arthur Joseph Lewis, 50 S.E.C. 747, 749 (1991); see also David Joseph Dambro, 51 S.E.C. 513, 517 (1993) (“Suitability is determined by the appropriateness of the investment for the investor, not simply by whether the salesman believes that the investor can afford to lose money.”). By relying solely on the sophistication or wealth of a customer, broker-dealers and/or associated persons would not adhere to FINRA Rule 2111 as they would not be considering the totality of the customer’s investment profile, which also includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs and risk tolerance. See FINRA Rule 2111(a). If you believe that your firm and/or broker invested in securities, or implemented an investment strategy involving a security that violated the FINRA Suitability Rule, please contact Lax & Neville LLP for a free consultation.

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