In recent years, particularly since the 2000 market slide, the issue of investment suitability has become a central factor in a majority of investor claims of stock broker misconduct. Establishing and proving such claims requires of the attorney and his expert both an understanding of the rules and guidelines for broker actions and the insight and experience needed to identify and, if found, to measure and prove the unsuitability of a specific course of broker conduct in guiding the customers account.

Regulations & Rules

Multiple layers of legal standards and industry rules have evolved in an effort to provide ample protection of investor interests.

At the federal level, the U.S. Securities and Exchange Commission holds that When your broker recommends that you buy or sell a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. The basis for this belief requires consideration of the clients overall financial situation, investment objectives and tolerance for risk.

The New York Stock Exchange (NYSE), NASD (National Association of Securities Dealers), and other industry self-regulatory organizations have in turn adopted investment suitability rules to be observed by member firms and brokers. Again, a balance of objectives, needs and risk tolerance is stipulated.

At the level of individual brokerage firms, extensive and detailed Compliance Manuals provide guidance for brokers to keep within reasonable standards for suitable conduct. Individual states also have regulations governing acceptable broker procedures.

Such rules notwithstanding, the question of investment suitability, while often the basis of a claim, can be difficult to identify and quantify without a knowledge of industry practices and a factual understanding of the quality and performance of stocks and various industry products including derivatives. Experience in discovery and documentation of patterns of misconduct is also important.

Types of Unsuitability

While the possibilities of stock broker misconduct might seem open-ended, experience has shown that the following situations can make strong cases for successful arbitration or litigation involving investment suitability:

Lack of Customer Knowledge Has the broker sought adequate information about the investors fiscal means, financial goals and life circumstances? Do records exist to show that this knowledge was sought or documented?

Change of Customer Risk Profile Was or should the broker have been aware of material changes in the investor profile including employment, age, health or lifestyle issues affecting risk tolerance and the needs for investment income or appreciation?

Lack of Diversity / Over-concentration Were the investors funds placed in an appropriate mix of investments compatible with his or her preferences, needs and risk profile, not only as to individual companies purchased but also among diverse industrial sectors? A common situation during the 2000 market slide was an over-concentration in the technology sector, which suffered significant losses while other sectors such as financial and healthcare services actually fared quite well. The market as a whole, as measured by the S&P 500 with technology and telecommunications stocks removed, actually made money over 2000 to 2002.

Excessive Use of Margin Were asset purchases made with margin and was the investor fully aware of the risks, costs (margin interest) and rules relating to such purchases? It is not uncommon that the basic costs of margin activity effectively preclude the possibility of reasonable investment return.

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