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Unsuitability and Regulation Best Interest

Did your broker recommend suitable investments that were in your best interest? Do these investments meet your investment objectives? Risk tolerance? Time horizon? Liquidity needs?

Regulation Best Interest versus Suitability

From Jenice's interview for the Masters of the Courtroom series on
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Regulation Best Interest (Reg BI) is a higher standard of care than the previously used “suitability” standard FINRA brokers were held to until 2020. Suitability dictated that any investments and strategies recommended by a financial professional met their clients’ defined needs and objectives. These recommendations were appropriately labeled “suitable.” The potential problem with the standard being “suitable” is that it may not fall in line with the average customer’s expectations of their broker’s responsibilities regarding their best interests. A  New York investment unsuitability and regulation best interest law firm  like Malecki Law can review the investments’ suitability and whether your portfolio was in your best interest at no cost. Reg BI brings the broker’s level of responsibility to his customer more in line with that customer’s expectations of it.

Reg BI also differs from FINRA’s suitability rule, in that it also applies to recommendations of types of accounts for retail investors including both FINRA brokers and non-FINRA licensed investment advisors. Financial planners should recommend types of accounts (i.e. – advisory, IRA, brokerage, etc.) that are in the client’s best interest, considering factors such as what the client requested, the client’s overall portfolio, products in the account, fees associated with the account, alternative account options, etc.

Regulation Best Interest

From Jenice's interview for the Masters of the Courtroom series on
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Reg BI is a standard of conduct for both FINRA and non-FINRA investment advisors, and was introduced by the SEC in April of 2018 as part of a larger overall plan that, once implemented, clarified, and advanced the duties and responsibilities of brokers and broker-dealers to their clients. As of June 30, 2020, all FINRA and non-FINRA investment advisors are now required to comply with the new regulations and standards. These new regulations require broker-dealers and other professionals associated with them to make recommendations regarding transactions and investment strategies, with their clients' best interest in mind, first and foremost.


From Jenice's interview for the Masters of the Courtroom series on
View Transcript

How might your advisor recommend unsuitable investments and violate Reg BI ? Your advisor can potentially violate the relevant industry rules if he or she recommends investments that are not appropriate for your age, income, and/or objectives. Brokers and advisors are required to act in your best interest and disclose any conflicts of interest.

Registered brokers are required to uphold certain standards when working with investor clients. This includes two important standards contained in FINRA Rule 2111 (Suitability) and FINRA Rule 2090 (Know Your Customer). If it seems like your broker did not comply with the FINRA rules, or Reg BI, it is possible that your broker sold you unsuitable investments that were not in your best interest. Malecki Law’s experienced New York investment unsuitability and regulation best interest attorneys can explain your rights and remedies in a free consultation.

  • FINRA Rule 2111(a).  FINRA’s suitability standard requires broker-advisers to have a reasonable basis to believe the transactions or investment strategies they recommend are suitable for the customer based on information they have obtained through reasonable diligence. This was historically the standard and was replaced with Reg BI in June 2020.
  • FINRA Rule 2090.  FINRA’s “Know Your Customer” (KYC) rule generally requires broker-advisers to know certain important facts about the customers.

The Suitability, Reg BI, and KYC standards protect investors by ensuring that brokers make recommendations in their clients’ best interests rather than their own. If a broker lacks a full understanding of both a product at issue and its customer, it is a violation of industry standards, a tort or a negligent act. Further, under these rules, brokers should make reasonable efforts to base the recommendations they make on factors such as the customer’s current financial status, tax situation, investment knowledge, short-term and long-term investment goals, and risk tolerance.

In addition to learning about customers and their financial goals, brokers and advisors should also adequately investigate potential investments to ensure they are appropriate for the customer and regularly monitor and evaluate the investment and the customer’s needs as their situation evolves. This is why FINRA requires firms and why the SEC requires advisors to regularly update customer account information, particularly if there is a change in circumstances.

Despite these and other important standards of conduct, such as Reg BI, some broker-advisers still make unsuitable recommendations that come with major consequences for clients. If there are any indications that your broker may have sold you unsuitable investments, you should contact Malecki Law’s experienced investment unsuitability lawyers in New York . Often, it is the result of negligence, self-interest, and the prospect of large commissions.

Unsuitable Investment Examples That Violate Regulation Best Interest

Brokers and advisors that fail to make appropriate recommendations can cause tremendous harm to investors. This can include exposing investors to excessive risk, illiquidity, costly fees that erode total return, and significant losses/loss of principal. If you notice your investments declined more than you expected, it may be a clue that your broker recommended unsuitable investments. A  New York investment unsuitability and regulation best interest law firm  like Malecki Law can review your potential case. For more information explicitly defining the legal definition of unsuitability, Malecki Law is willing to review your portfolio at no cost to see if FINRA’s rules and guidelines were followed. While every case is unique, some examples of unsuitable investments may include the following:

  • Recommendations to invest in illiquid private placements, such as non-traded REITs for clients that had access to their money.
  • Employing an overly risky investment strategy for a retired, elderly client.
  • Failing to adequately research an investment product and disclose all risks.
  • Misrepresenting an investment product to personally profit.
  • Unsuitable, risky options trading strategies for a client looking to preserve capital.
  • Advising a client to inappropriately concentrate investments at the expense of diversification.

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