by Brian Mahany
On Monday, new rules are in effect for stockbrokers, rules that benefit customers. The Financial Industry Regulatory Authority, or FINRA, issued new rules in late May to enhance due diligence requirements for stockbrokers. Those rules take effect July 9th.
Investment advisers have long owed a fiduciary duty to their clients. Customers of brokerage firms did not enjoy anywhere near the same protections. The new rules and some new regulatory guidance go a long way to eliminating the disparity.
The new rule specifically states that brokers must consider a client’s age, investment experience and liquidity needs in determining what an investment may be suitable. For example, we have seen a number of older clients nearing retirement that were placed in non-liquid and non-traded Real Estate Investment Trusts – that type of investment may be great for someone who doesn’t need their money for 20 years but is questionable when placed in the portfolio of someone in their 70’s.
The new rules also require stockbrokers to understand the products they are selling. We have often found brokers selling complex derivatives or even supposed tax shelters yet neither they nor their customers could explain how the investment operated.
Perhaps the biggest change isn’t in a rule, it is part of new guidance recently issued by FINRA.
Until now, a stockbroker had an obligation to understand their customers’ needs (“Know Your Customer” rules) and make suitable investment recommendations (“Suitability” rules). The new guidance call for brokers to make recommendations in the “best interests” of their customers.
To some readers, this may sound like legal mumbo jumbo but the distinction is important. Under the old rules, a broker could make a recommendation that was in the broker’s best interest (usually something that generates high commissions) as long as the recommendation was suitable. Such a recommendation probably wouldn’t be in the customer’s “best interest”, however. The old standard was more oriented to the brokerage firm while the new guidance clearly looks to the best interest of the customers.
The new guidance (FINRA Regulatory Notice 12-25) also goes beyond traditional stocks and bonds and now extends to “investment related products.”
All in all, the new rules and guidance provide a significant boost to customers who lose money following the recommendations of their broker. The SEC has been considering tightening the standards by which stockbrokers operate. FINRA’s actions appear to be a significant first step to a full blown fiduciary standard.
If you have lost money to a stockbroker, give us a call. Most losses can be handled by arbitration and those cases are usually complete within a year. If you believe that your stockbroker (or investment advisor or other financial professional) gave you bad advice, did not understand your needs or placed you in sophisticated derivatives or options that you do not even understand, you may have a claim. While brokers can’t guarantee every investment decision, they do have an obligation to understand your needs and make appropriate recommendations.
For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at All inquiries are kept in strict confidence.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. Legal services available in many states and through our network in states where we do not practice.