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Investments - Private

Brokers’ Rocky Relationship with Private Securities Transactions [Part 2 of 2]

August 11, 2020

[Image: Suitability / Woolbright Group]



by Howard Haykin


Only time will tell how good a broker’s recommendations are. Of more immediate concern, perhaps, is ... how and why did a broker recommend a particular security to specific customers or investors? 


  • What reasonable basis did the broker have for believing the investment was suitable?
  • How well did the broker understand the security (its risks, rewards) before recommending it?
  • How fully and accurately did the broker communicate the underlying nature of the recommended security to customers and investors, including their merits and attendant risks?


Brokerage customers draw comfort knowing that a broker's recommendations are supported by the diverse expertise and oversight of a brokerage firm – its research analysts, investment bankers, and supervisory personnel.


Except there is no back up support when brokers engage in PRIVATE SECURITIES TRANSACTIONS - - any securities transaction outside the regular course or scope of the broker’s association with a member firm, including, but are not limited to, new offerings of securities which are not registered with the SEC.
In these instances, there’s no one to question the judgment of a broker: (i) who recommends an unsuitable speculative investment to a risk-averse customer, or (ii) who is unable to conduct due diligence that’s needed to assess the viability of an private issuer and its security offering, or (iii) who misleads customers by exaggerating a deal's merits while omitting all the ways it can all go wrong.



INVESTOR TYPES AND INVESTMENT RISK.    It's a given that all investments carries "RISK"  - - the chance that an outcome or investment's actual gains will differ from an expected outcome or return. Risk also includes the possibility of losing some or all of an original investment. So the relevant question for individuals is … which type of investor are you?




To identify one's ‘investor’ type, refer to the 'Investment Profile' on the brokerage firm's New Account Form. 'Investment Profile' includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance.



[For further details on Suitability, click on … FINRA Rule 2111.]

[For further details on Private Securities Transactions ..., click on … FINRA Rule 3280.]

[For further details on Communications with the Public ..., click on … FINRA Rule 2210(d).]