Investor Bill of Rights 2 and 3

Our last post described the “Investor Bill of Rights” created by the North American Securities Administrators Association (NASAA).  We recently posted the first “Right”.   Set out below you will find Rights 2 and 3 along with my comments:

INVESTOR RIGHT #2) Receive complete information about the risks, obligations, and costs of any investment before investing.

Comment: The key word here is “complete.” It is not enough for a broker to say (usually after the fact) that everyone knows there is a “risk.” The broker dealer claims to offer, and within realistic expectations, should offer their securities expertise. Complete information should include standard deviation and/or beta of a recommended stock or mutual fund. For bonds, minimal disclosures would include the rating of the specific bond.  For complex structured financial products, the ratings alone are wholly insufficient to fully capture the risks embedded in those products.  The problem is exacerbated by the fact that the public customer was allowed even to invest in this volatile product market.

INVESTOR RIGHT #3) Receive recommendations consistent with your financial needs and investment objectives.

Comment: This used to be covered by NASD Rule 2310 which covered the “suitability” of a specific security for a particular investor.  The security itself had to first be suitable for SOME investors (Reasonable Basis Suitability) and only then should it be tied to a customer’s individual financial situation (Customer Specific Suitability).  The new FINRA Rule 2111 has been adopted and affords protection for investors regarding recommended strategies including recommendations to “hold.”  While this may lead to increased enforcement actions by FINRA, it remains to be seen how arbitration panels will deal with the new language.

To learn more about Dale Ledbetter, visit his website at www.dlsecuritieslaw.com.

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