Supervisory Red Flags Under Rule 2111

The
Notice requires firms to have a supervisory system to focus on the detection, investigation and
follow-up of “red flags” indicating that a Registered Representative may have recommended an unsuitable
investment strategy with both a security and a non-security component.  For example, a
Registered Representative’s recommendation that a customer with limited means purchase a large position
in a security might raise a red flag regarding the source of funds for such a purchase. 
Additionally, the liquidation of a large position in blue chip stocks paying regular dividends is
cited in the Notice as a “red flag” as to whether or not that recommendation is part of a broader
investment strategy.

 

The suitability rule has also been determined to apply in
the context of a recommended investment strategy involving a security and an outside business activity,
requiring the brokerage firm to obtain a general understanding of the outside business activity (see
FINRA Rule
3270
).  The Regulatory Notice closes by indicating “. . . broker-dealers must
keep in mind that, in addition to suitability and supervisory responsibilities, firms have other
regulatory obligations to investigate unusual activity.”

 

We offer a free initial consultation to investors who feel
they may have been victimized by the improper recommendation of an improper investment strategy, or
non-security product or improper outside business activity.

 

The Law Offices of Timothy J. O’Connor is one of the
only law firms practicing securities law in the Tri-City Capital District of
Albany
, Schenectady and
Troy
.  We also represent victimized investors throughout the rest of New
York State, including Buffalo, Binghamton, Syracuse, Watertown, Utica, Kingston, New York
City/Manhattan, Long Island, and everywhere in between, as well as in the surrounding states of
Massachusetts, Vermont, New Hampshire, Connecticut, and New Jersey.

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