The most important element of proof in an unsuitability case is the credibility of the customer and the specificity of his or her testimony with regard to stated investment objectives. The credibility of that customer will be enhanced or diminished by the above-listed supporting documents. Risk tolerance is the key. What is suitable for one investor will not be for another. A broker must “know the customer” and learn about a customer’s income, sources of income, current investment portfolio, retirement plans, real estate holdings, net worth, so the broker can be in a position to recommend consistent with a customer’s needs and risk tolerance. Liquidity, term, and tax considerations are important parts of knowing the customer. See Securities Arbitration Procedure Manual, 5th Ed., David E. Robbins, Lexis, 2001.
An investor may be a conservative, growth, income, or speculative investor, among other factors. Investments can have many appropriate risks: inflationary risk, selection risk (the company may be the one to fail), timing risk, interest rate risk, market risk (price volatility), credit risk, liquidity risk (limits on being able to liquidate the investment when you want to), legislative risk (that a change in the laws will directly affect the value of the investment) call risk (that a bond will be returned at a time of lower rates).
Suitability analyses issues and facts include:
1. Determining the trading strategy pursued in the account, by time period, and by securities and determining when the strategy was changed.
2. Determining which securities and strategies were unsuitable or inconsistent with the customer’s investment objective, needs, and risk tolerance. Whether any of the investment choices were consistent with the customer’s actual investment objectives. A reconstruction using sources of financial data is usually required.
3. Whether the brokerage firm had any direct interest in any of the securities in which the customer was wrongfully placed.
4. Determining how the account would have done had the trading been consistent with the customer’s objectives.
5. Obtaining research reports, opinions, and other financial data available to brokers at the time of purchases and sales.
6. All documentation of trading, including order tickets, posting sheets, holding pages, cross-reference tables, trading confirmations, exception reports, commission runs, and monthly statements. Discovering the broker house’s standards of practice set forth in the firm’s compliance and operations manuals and comparing those to the industry standards, and to the broker’s performance. What supervision of the broker was actually performed, and what was required by the supervisory manual and industry standards.
Suitability is a very important cause of action which requires the collection of and analysis of substantial facts about the broker’s conduct, the customer’s needs, and the brokerage houses’ requirements and supervision. But when credible testimony from the investor is combined with deatiled analyis of the facts and law, the investors chances of prevailing on a suitablity claim rise dramatically.
