Daniel Carlson is a San Diego-based securities lawyer with a focus on litigation, specialized in recovering investment losses for his clients.
The Financial Industry Regulatory Authority (FINRA) helps regulate member firms that are part of the finance industry. Most large brokerage firms are members of FINRA, and clients of those firms are required to arbitrate any dispute they have with the member brokerage firm in the FINRA forum rather than in a court of law. Among other goals, FINRA tries through regulation to prevent securities fraud and cases of other types of customer abuse by member firms, financial advisors and other professionals within the industry.
Under FINRA Rule 2111(a) it is the responsibility of the member firms of the financial services industry, and associated advisors within the industry, to determine whether or not a transaction or investment strategy that they are recommending to a customer is “suitable” for that customer. In determining the suitability of an investment, the advisor and firm are to determine whether or not it is an appropriate investment for that particular customer given his or her goals (what he or she hopes to receive from the investment), how long the customer is willing to go before receiving money back from the money that is invested, and whether or not the customer is willing to tolerate the level of risk that accompanies that type of investment.
Regardless of whether or not the financial advisor personally feels that a particular course of action would be advisable for that customer, they will be held to an objective standard to avoid instances of securities fraud, a standard that requires the advisor to be diligent in ascertaining and updating the customer’s investment profile. This profile includes such things as the customer’s age (particularly in cases of elder abuse in the realm of securities fraud), other investments made by the customer, the customer’s personal financial situation and needs, his or her tax status, and his or her investment objectives and experience.
In California, most financial consultants and advisors owe a fiduciary duty to their customers under the law. A fiduciary duty extends from a relationship premised on trust between two or more parties. It is essentially one party’s commitment to act in the best interest of the other party involved in the transaction. Therefore, in the realm of personal finance, this means that a financial advisor has a legal duty to protect your best interest as the customer when managing your money and making financial decisions on your behalf. In short, this fiduciary duty is breached whenever a member of the financial industry fails to act in the best interest of the customer.
For investment advisors, the Investment Advisors Act, from 1940, binds them to a standard that creates a fiduciary duty. These investment advisors may face regulation by either the SEC or by securities regulators on a state level, and each of these bodies holds advisors to their fiduciary duty, requiring them to place the interests of their client above the interests that they themselves possess. The act specifies what it means to be a fiduciary, stipulating that advisors must put their own interests below those of their client. Further, the fiduciary duty includes both care and loyalty, explaining that the advisor must simply act in the client’s best interest. For instance, before buying securities for a client, an advisor cannot purchase them for his or her own account; advisors are also forbidden from engaging in trades that could result in larger commissions for either the advisor or the advisor’s investment company.
These rules were enacted for the protection of financial customers and members of the financial industry are therefore required to abide by these regulations so that customers do not experience financial loss or fraud.
If you think that you have been the victim of investment fraud in regards to being recommended to undertake an investment strategy or engage in investment transactions that were not suitable for you as a customer, contact Daniel Carlson at the Carlson Law Firm today for a free consultation at 619-544-9300.