• Neal Shikes

Behaviors and Methodology Determine Both Suitability and Fulfilling Fiduciary Duties


As determined as some are, suitability and fiduciary standards cannot be dismantled by disclaimers and disclosures. Ethical behaviors are not determined by outcomes structured within the confines of a contract. Attempts to do so only make “what is fair” and “what is ethical” esoteric and, perhaps, that’s what its intentions are. However, FINRA provides us all with a guideline if not a fair warning in Rule 2111 Supplementary Material:

01 General Principles.

Implicit in all member and associated person relationships with customers and others is the fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken only on a basis that can be judged as being within the ethical standards of FINRA rules, with particular emphasis on the requirement to deal fairly with the public. The suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct.

Source: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9859

02 Disclaimers.

A member or associated person cannot disclaim any responsibilities under the suitability rule.

Source: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9859

When there are several complexities in a product including the manner in which it can be transacted then those complexities must be examined individually and in aggregate. Volatility, that may be inherent to the product or as a result of an economic shock, can only be amplified when there are layers of determinants. Even if an astute Investment Adviser can explain the product’s characteristics, can either the adviser or investor ever understand the potential outcomes and why it is suitable? FINRA seems to address this conundrum in a Q&A session about “Reasonable-Basis Suitability”:
A broker could violate the obligation if he or she did not understand the recommended security or investment strategy, even if the security or investment strategy is suitable for at least some investors. A broker must understand the securities and investment strategies involving a security or securities that he or she recommends to customers.

Source: http://www.finra.org/industry/faq-finra-rule-2111-suitability-faq, A5.1.

So once again we revert to the subjectivity of “what is reasonable” and “what is fair” and by doing so accepting that the only way to make this determination is by examining the product itself and the behaviors and actions of those who present the product. Here, there is a clear distinction between outcome and behaviors because if one tried to examine outcome, whether determining suitability or fiduciary duty, then the subject matter can twist into what cannot be predicted like the market’s performance which is not causation.

In conclusion it seems, whether the focus or legality is suitability or fiduciary duty, shouldn’t behaviors, methodology, and the determinants of the product be causation and predicate “what is fair” and “what is ethical” and not whether or not a disclosure or disclaimer was offered?

#FiduciaryLaw #Law #ERISA #Suitability #FiduciaryDuty

Recent Posts

See All