Legal Memorandum: Low Tolerance for Investment Risk

Issue: What standard is applied to determine whether an investment meets the suitability standard for low tolerance for risk, and what are the steps for filing an unsuitability claim?

Area of Law: Corporate & Securities
Keywords: Suitability standard; Unsuitability claim; Investment
Jurisdiction: Federal
Cited Cases: 703 F. Supp. 2d 910; 632 F. Supp. 471; 425 U.S. 185
Cited Statutes: NASD Rule 2310; Securities Act Section 10(b) and SEC Rule 10b-5; FINRA Rule 2111; 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5
Date: 03/01/2012

NASD Rule 2310, entitled “Recommendations to Customers (Suitability),” provides:

(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.


(b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:


(1) the customer’s financial status;


(2) the customer’s tax status;


(3) the customer’s investment objectives; and


(4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.


NASD (FINRA) R. 2310 (effective until July 8, 2012).*FN1 

On October 7, 2011, the SEC approved a new suitability rule, effective in July of 2012, as part of its rule consolidation process (consolidating the NASD and NYSE rules).  See n.1, supra.  The new FINRA rule, Rule 2111, is modeled after NASD Rule 2310.  The new rule includes an expanded list of the types of information that firms and […]

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