Uncompensated Risk of Catastrophic Loss

Financial advisors are required to disclose the risks associated with a particular investment or investment strategy for securities held with the brokerage firm. Any investment recommendation should consider the composition of securities held in an investment portfolio. Failure to recommend a strategy to manage the risks associated with securities concentration may be broker negligence and a violation of the securities industry minimum standard of care. An investor can maintain a concentrated portfolio for various reasons. A portfolio may have been concentrated as the result of one or more of the following reasons:

• Employee Stock Option Plan (ESOP) Participant
• Stockbroker Recommendation
• Founding Member of Publicly Traded Company
• Closely-held Bank Stock Acquired through Merger or

Acquisition

In some instances an investor might be restricted by an employer from selling stock, want to defer taxes, or have an attachment to the company shares. No matter what the reason for not selling a concentrated stock position, a financial advisor must recommend suitable risk management strategies to protect the value of the concentrated stock position.

Recent Failure to Diversify

In recent market turmoil, the bank and financial sector meltdown experienced the acquisition of Bear Stearns, the takeover of Merrill Lynch, the bankruptcy of Lehman Brothers and the conservatorship of Fannie Mae and Freddie Mac, while investor stock losses decimated the value of a lifetime of investment. Prudent investment advice warns against the concentration of investments into the banking and financial services sector of the economy. Portfolios concentrated in the following securities have suffered disproportionate losses to the overall stock market:

• Bank of America
• Citigroup
• Life Partners Holdings, Inc
• Popular, Inc
• Beazer Homes USA, Inc
• Medical Capital Notes
• YRC Worldwide
• Fannie Mae
• Ambac Financial Group
• Washington Mutual
• AMCORE Financial
• Irwin Financial
• Citizens First Bancorp
• Euro Bancshares
• Countrywide Financial

Investors who maintained a concentrated portfolio without investment advice to manage the risks of securities concentration may be able to recover their investment losses from unsuitable investment advice .

Frequently Asked Questions:

Q:What duties and obligations do stockbrokers have to recommend diversification and implement risk management strategies for concentrated positions on behalf of their clients?