SEC Warns Brokers Putting Clients in Unsuitable Investments

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The Securities and Exchange Commission issue an alert to brokerage companies about putting retail clients in risky, complex investments after an analysis of more than 25,000 transactions in structured securities products.

Brokers are required to find investment projects for their clients which match their objectives and risk tolerance. This is known as the suitability standard.

The government’s review of broker-dealers found the complex investment products were targeted at elderly customers, non-English speaking clients and conservative investors. Each of the firms examined had written policies governing suitability but the SEC found that the compliance controls were not adequately implemented or consistently applied.

These products are designed to provide exposure to asset classes such as securities, options, commodities, and/or foreign currencies. They are often bonds backed by stocks that hedge their risk with options. They are typically used to provide income in a low interest rate environment.

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