Stockbrokers and investment advisers may only make investment recommendations that are "suitable" for each investor. Before making any recommendation, a stockbroker must investigate the customer's financial situation, prior investment experience, tolerance for risk and other factors which determine whether a particular investment or investment strategy is suitable for the customer. Other factors that should be considered are a customer's age, income, net worth, liquid net worth, education, understanding of risk, ability to afford the risk, other investments and financial needs. All of these factors must be considered before making any recommendation. If a broker does not inquire and learn about the customer's suitability profile, that failure is a violation of the suitability rules and can be the basis of a recovery in arbitration.
Additionally, after determining the customer's investment objectives and tolerance for risk, stockbrokers and investment advisers have a duty to investigate the risks of each recommended investment, and to disclose those known or discoverable risks to the investor before entering into a transaction for that security. This would include the broker's conducting sufficient due diligence on the security to determine what level of risk an investment in such security would pose to the particular customer. This may be done by reviewing the periodic SEC filings and audited financials of the Company, its press releases, research reports, trading history, liquidity, and analyst recommendations, as well as the sector, and the overall market and economy. A broker's failure to disclose the known or discoverable risks about a particular investment or investment strategy may be a violation of the suitability rules, resulting in fraud or other actionable misconduct. Generally, it is not necessary that the broker intend to conceal facts from you, but only that the broker failed to discover easily discoverable facts which the investor would have felt important in making a decision whether to invest in the security.
To learn more about suitability, call us at 903-597-2221 or contact us online.