It was the overconcentration in technology related secuities in 2001. The overconcentration in securities of financial institutions in 2008. The overconcentration in precious metals and commodities in 2011. Now it is the overconcentration in energy or oil & gas related securities, or even more recently, include the overconcentration, or more than 10% of an investor’s investable assets, in non-traded alterative investments, including Real Estate Investment Trusts (REITs), Business Development Companies (BDCs), and Limited Partnerships (LPs).
While the purchase of any particularly speculative security may not be actionable as unsuitable, the over concentration of an investor’s portfolio in one security, the securities of one issuer, or the securities of one industry or economic sector, if not reckless, is actionable as the failure to diversify. See In re Rafael Pinchas, Exchange Act Rel. No. 41816, at 10-12 (Sept. 1, 1999)(“the suitability rule can be violated if a representative’s recommendations are quantitatively unsuitable”)(emphasis added).
FINRA Conduct Rule 2310, with respect to the suitability of investment recommendations, and that duty to only make recommendations consistent with the customer’s stated tolerance for risk or expressed investment objectives, “is especially true where a broker/dealer’s recommendation leads to a high concentration in the customer’s account of a particular security or group of securities that are speculative.” See, e.g., In re Clinton Hugh Holland, Exchange Act Rel. No. 37991, at 8 (Dec. 21, 1995), aff’d., 105 F.3d 665 (9th Cir. 1997)
Over concentration or “the breach of the duty to diversify constitutes an independent basis of liability, separate from a breach of the general duty of prudence.” Liss v Smith, 991, F. Supp. 278, 301 (S.D.N.Y. 1998)(emphasis added); See also Stephen Torlief Rangen 52 S.E.C. 1304, 1308 (1997) (finding that broker’s recommendations were unsuitable, where they resulted in 80% of the equity in customers’ accounts being concentrated in one stock – ‘”by concentrating so much of their equity in particular securities, [the broker] increased the risk of loss for these individuals beyond what is consistent with the objective of save, non-speculative investing”).
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