As an investor, you may have heard of FINRA Rule 2111, also known as the suitability rule. But what exactly is FINRA 2111? And how does it affect you and your investments?
When you hire a brokerage firm or financial advisor to make transaction or investment strategy recommendations, you expect that they will do so in a manner that is suitable for you and your particular circumstances. Unfortunately, however, this is not always the case.
If you have suffered financial losses as a result of unsuitable investment strategies and recommendations by your financial advisor, contact securities law attorney Robert Wayne Pearce today.
An Overview of FINRA Rule 2111
Suitability in investing is an overarching concept that describes whether an individual investment is suitable for a client after consideration of that particular client’s characteristics.
The suitability rule requires financial advisors to have a “reasonable basis” to believe that a recommended transaction or investment strategy is suitable for their client. A financial advisor determines the suitability of a particular transaction or investment strategy through learning about the investment profile of his or her customer.
Experts interpret FINRA Rule 2111 as requiring financial advisors to make recommendations that are in their customer’s best interests. FINRA outlines situations involving financial advisors violating the suitability rule by placing their interests above the interests of their client, including:
- Financial advisors who recommend that clients use margin to purchase a larger number of securities to increase commissions;
- Brokers who recommend unsuitable securities with high commissions because of pressure from their firm to sell the securities; or
- A broker who recommends one product over another with the goal of earning more commissions.
Unsuitable investment recommendations lead to thousands of dollars in losses for investors every year based on financial advisors recommending products that are illiquid, speculative, and high-risk. If this has happened to you, contact an experienced investment losses attorney today to get started on your case.
Suitability Obligations Imposed by FINRA Rule 2111
Rule 2111 consists of three primary obligations: reasonable basis suitability, customer-specific suitability, and quantitative suitability.
Reasonable Basis Suitability
Reasonable basis suitability mandates that a financial advisor have a reasonable basis, based on reasonable diligence, to believe that a recommendation is suitable for the public at large. This reasonable diligence should provide the financial advisor with a basic understanding of risks and rewards associated with the recommended transaction or investment strategy.
A broker must comprehend the risks and rewards associated with a particular investment. Failure to do so and recommending the investment to a client anyway could result in charges of misrepresenting the investment.
If a broker fails to comply with any of these requirements, the reasonable basis suitability obligation is not met.
Customer-specific suitability involves considering specific details about an individual customer to determine whether a transaction or investment strategy is suitable.
A customer’s characteristics that are to be considered during a suitability analysis include:
- Employment status,
- Financial situation,
- Tax status,
- Experience investing,
- Investment goals,
- Risk tolerance,
- Liquidity needs, and
- Investment time horizon.
The financial advisor should evaluate these characteristics in determining whether the investment or strategy is suitable for that particular customer.
The quantitative suitability element evaluates the volume of trades made by a financial advisor.
For a quantitative suitability analysis, transactions made in a customer’s investment account are viewed in the aggregate. The question is whether the investments recommended qualify as a suitable strategy overall, not whether each individual transaction was suitable.
The quantitative suitability obligation seeks to prevent financial advisors from making excessive trades in a client’s account solely for the purpose of generating commission fees.
Contact an Investment Loss Attorney Today
FINRA 2111 investment loss cases can be particularly complex. That’s why it is important to have an experienced investment loss attorney in your corner.
Since 1980, the attorneys at The Law Offices of Robert Wayne Pearce, P.A., have represented countless investors as they fight for their rights. If you are a victim of broker negligence or misconduct, we want to help.
We have recovered over $140 million for well-deserving clients, and we will fight to get you the results you deserve too.
Contact our team today for your free case evaluation, and see what we can do for you.