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Specialist Suitability Obligations - Who's Ultimately Responsible?

Posted by Jack Duval

Dec 9, 2013 7:13:00 AM

This blog post continues our expert analysis of broker-dealer specialists and specialist suitability obligations when interacting with clients and representatives.

Much of this series of blog posts has revolved around a centeral delimma:

What happens when the representative, who knows the client, and the specialist, who knows the product or strategy, come together to make a recommendation to the client. The representative and specialist can both be assumed to know (respectively) the client and the product, but what if neither knows both? In such an instance, can a suitable recommendation be made?

The short answer is no.  But where does the ultimate responsibility fall?

If a specialist is at any point involved in a recommendation to a client, then the specialist must know enough about the client to make a suitability determination. Commensurately, the representative must also know enough about the product to make a suitability determination. If either fails in this regard, the recommendation made cannot be said to be suitable.

Irrespective of specialist involvement, under FINRA Rule 2111 (and its predecessor, Rule 2310) the ultimate responsibility for a suitable recommendation lies with the representative. The representative knows the client better than anyone at her firm and is the one inviting the specialist in to help with the sale. However, it bears repeating that the specialist is subject to the suitability rules if they partake in making the recommendation to the client. 

Specialist suitability expert John Duval, Sr. and CEO Jack Duval have written a white paper on specialist suitability obligations.  It can be accessed here.

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Topics: broker-dealer specialist system, specialists suitability, investment recommendation

Specialist Suitability Obligations - Representative-Specialist Interactions - Part 2

Posted by Jack Duval

Dec 8, 2013 7:30:00 AM

This blog post continues our expert analysis of broker-dealer specialists and specialist suitability obligations when interacting with clients and representatives.

Specialist Obligations When Working with a Representative

If the specialist is an associated person[1] with a FINRA member firm, and knows the client, then they have a clear suitability obligation under FINRA Rule 2111 for any recommendations. They can learn about the client from a new account form, a financial plan, or other document containing client profile information, or from conversations with the investor and representative.

As discussed above, the basic customer-specific facts the specialist would need to know, include:

  • Age;
  • Other investments;
  • Financial situation and needs;
  • Tax status;
  • Investment objectives;
  • Investment experience;
  • Time horizon;
  • Liquidity and cash flow needs;
  • Risk tolerance;

A key question for the applicability of the suitability rule to a specialist revolves around FINRA’s standard of what constitutes a “recommendation”. FINRA has addressed this in the context of online trading firms issuing generic buy recommendations on stocks. A two-fold standard was established to determine if a recommendation had been made (and thus would be subject to the suitability rule):

  1. The communication must be a “call to action” to the client; and
  2. The more tailored the communication was to a client’s specific facts and circumstances, the more likely it was to be a recommendation.[2]

Very simply, if a communication is made to the client calling them to action, and the communication was made specific to the client’s particular facts and circumstances, then it is a recommendation.

However, this standard creates two scenarios in which a specialist would not be subject to the suitability obligation:

  • The first is a situation where the specialist is not making a call to action to a client, but is communicating generically about a particular product or service to the representative. Such scenarios could include: educational and training presentations; product “roll out” meetings; and general inquiries from representatives with non-client specific questions.
  • The second is the rare case where a specialist meets with a representative and client to discuss a product, is fully informed of the client’s specific facts and circumstances, but no call to action is ever made to the client to purchase the product.

Importantly, the suitability obligation would be in effect if the specialist met with the representative and client and the sale was consummated at a later date after other discussions or meetings with the representative. In this scenario, the specialist’s participation would have been part of the recommendation and in contemplation of the call to action to the client.

Specialist suitability expert John Duval, Sr. and CEO Jack Duval have written a white paper on specialist suitability obligations.  It can be accessed here.

Notes

[1]           FINRA defines an associated person, in part, as “a natural person registered under NASD (now FINRA) rules…” See FINRA Rule 1011 (Definitions).

[2]           See FINRA NTM 01-23 (Online Suitability).

Get Updates on Specialist Suitability 

 

 

 

 

 

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Topics: broker-dealer specialist system, specialists suitability, investment recommendation, call to action

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