May 14, 2020

Suitability Doctrine

Suitability Doctrine

The Limits of the Suitability Doctrine in Commodity Futures Trading
      Walter C. Greenough, 47(3): 991–1009 (May 1992)
Courts and regulators have wrestled with the question of whether brokers have a duty to prevent "unsuitable" customers from trading commodity futures. The author argues that these decisions, and the policy considerations underlying them, indicate that the duty of brokers should be limited to disclosure of the risks of trading; it should then be left to the customers themselves to determine whether they are willing to accept those risks.

Suitability in Securities Transactions
      Lewis D. Lowenfels and Alan R. Bromberg, 54(4): 1557–97 (Aug. 1999)
This Article addresses the suitability doctrine under the federal securities laws—the duty on the part of the broker to recommend to a customer only those securities which are suitable to the investment objectives and peculiar needs of that particular customer. The suitability doctrine entails the matching of two elements: (i) the investment objectives, peculiar needs and other investments of the particular customer with (ii) the characteristics of the security which is being recommended. All of the suitability rules of the various self-regulatory organizations—the NASD, the NYSE, the Chicago Board Options Exchange, and the Municipal Securities Rulemaking Board—are analyzed. Disciplinary actions under the suitability rules of these self-regulatory organizations are discussed. The SEC's role in the development of the suitability doctrine over the years is traced. Finally, private damage actions based upon the suitability doctrine under federal law, state law, and in arbitration proceedings are compared.

The Suitability Rule, Investor Diversification, and Using Spread to Measure Risk
      Richard A. Booth, 54(4): 1599–1627 (Aug. 1999)
This Article reviews the state of the law regarding actions against broker-dealers based upon the NASD suitability rule and similar theories, summarizes the theory and practice of investor diversification, explains the motivations that may lead a broker to recommend excessively risky securities and investment strategies, and discusses the various methods that may be used to quantify or compare risk, focusing in particular on how the bid-ask spread may be used as a forward-looking surrogate for the direct measurement of risk.

The Best of Both Worlds: A Fact-Based Analysis of the Legal Obligations of Investment Advisers and Broker-Dealers and a Framework for Enhanced Investor Protection
      James S. Wrona, 68(1): 1 - 56 (November 2012)
A crucial debate on financial regulatory reform, affecting virtually every investor in the United States, is now taking place. The debate centers on the standards of care required of financial professionals when they provide investment advice. Two separate and markedly different regulatory regimes apply to these financial professionals: one for investment advisers and one for broker-dealers. This article discusses recent congressional initiatives related to advisers and broker-dealers, reviews existing obligations when advisers and broker-dealers provide advice to customers, and identifies regulatory gaps that need to be bridged. The level of regulatory oversight that both models receive also is explored. Finally, the article offers a framework to ensure robust investor protection and, as part of that framework, recommends that policymakers impose additional obligations on both broker-dealers and advisers to achieve truly universal standards of conduct that are in investors' best interests.