Series 65

AAA

Handling Client Funds - Restrictions on IA Recommendations

The Uniform Securities Act requires IAs to determine the suitability of investment recommendations given each client's circumstances. Failure to do so is considered an unethical business practice and is subject to the penalties referred to in previous sections.

The following practices are examples of violations of the suitability rules:

  • Recommending securities without having a reasonable basis for the recommendation
  • Recommending securities without taking the client's financial situation, needs and objectives into account
  • Recommending the same security to all clients
  • Failing to describe important facts and risks about the security to each client
  • Churning in a client account (making trades too frequently in order to increase commission)
  • Providing services that are not appropriate to the client's situation and needs
  • Failing to inquire into a client's tax situation, risk tolerance and other assets

The Investment Advisers Act of 1940 also defines "failure to meet suitability standards" as an unethical practice.

  • An IA who does not make reasonable inquiry or suitable recommendations, given the information from such an inquiry, is guilty of violating the suitability requirements.
Prudent Investor Standards
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