Sales Practice Disputes

If you are involved in dealings involving sales practice disputes or irregularities, you can count on Mark Anchor Albert and Associates to represent you well.

FINRA (the Financial Industry Regulatory Authority), which was formed by the consolidation of the NASD (the National Association of Securities Dealers) and parts of the NYSE (the New York Stock Exchange), has issued various notices, rules, and regulations to ensure that broker/dealers, market makers, and other types of securities firms use appropriate sales practices in their dealings with the public. FINRA has been engaging in disciplinary proceedings and regulatory sweeps, as well as issuing periodic Investor Alerts and Regulatory Notices, to educate NYSE member firms and the investing public about their obligation to avoid misleading, manipulative, and coercive sales practices.

The suitability of investments recommended to investors is a matter of constant regulatory concern and enforcement activity. NASD Rule 2310 requires that in recommending “the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable” for that customer, based on “the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.” The rule also requires that, before executing a recommended transaction, a firm must make reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives, and “such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.”

Member firms are not guarantors of the success of investments in securities they recommend and sell. But they do have an obligation to make sufficient inquiries and disclosures so that their sales and marketing efforts are not materially misleading or unsuitable for particular customers. Member firms therefore should adequately understand the products their brokers recommend, market, and sell, and should provide instructions and guidelines so that their brokers give to their customers a fair and balanced picture of the risks, costs, and benefits associated with the products or transactions they recommend. Products should not be recommended that are not suitable for particular customers in light of the customer’s sophistication (or lack thereof), financial goals, needs, and risk tolerance.

To assess the suitability of a financial product, security, or transaction for a particular investor, firms and registered representatives are cautioned by FINRA that they should make reasonable efforts to inquire about a customer’s liquidity needs, life stage, and time frame to achieve their financial objectives. Examples of some of types of questions a broker, sales executive, or other registered representative should ask of prospective customers include the following:

  • What is the customer’s employment status?
  • What are the customer’s primary expenses?
  • How does the customer derive his or her income?
  • How much income does the customer need to meet his or her fixed expenses?
  • What are the customer’s financial goals and expectations?
  • Does the customer need to generate income for healthcare costs in light of his or her available health insurance or lack thereof?

NASD Rule 2210 and NYSE Rule 472 also prohibit firms and registered representatives from making false, exaggerated, unwarranted, or misleading statements or claims in communications with the public. They also are prohibited from engaging in aggressive and misleading sales tactics. Investors should be wary of opportunities that promise spectacular profits or “guaranteed” returns, and member firms and their representatives should be trained to avoid exaggerated or “guaranteed” rates of return that are not iron-clad, unless full and adequate disclosures of contingencies, conditions, and risk factors are made. Investors should be skeptical of promises of above-market returns, abnormally consistent, favorable results, and other “red flags” of investment returns “too good to be true.” Member firms and registered representatives must be adequately trained and supervised so that they do not cross the line into prohibited sales practices. To prevail on a suitability claim, the customer generally must prove: (1) that the broker recommended securities that are unsuitable in light of the customer’s investment objectives; and (2) that the broker did so with intent to defraud or with reckless disregard for the client’s interests. E.g., Brown v. E.F. Hutton Group Inc. (2d Cir. 1991) 991 F.2d 1020, 1031.