Josiah Lederman, of Fort Wayne, Indiana, a stockbroker associated Concorde Investment Services is the subject of a FINRA securities arbitration claim seeking up to $1 million in damages.
According to FINRA Public Disclosure, Lederman is alleged to have breached his fiduciary duty, failed to perform due diligence, and failed in his supervisory responsibilities, in connection with the unsuitable investment recommendation of certain direct participation programs or alternative investments.
The sale of complex products need to be approved and vetted for suitability per FINRA rules. A firm or broker needs to perform reasonable due diligence, and they must understand the nature of the transaction, the strategy behind it, and the potential risks and rewards.
The requirements for due diligence to be reasonable will vary depending on the complexity of the product, its associated risks, and how familiar the firm or the broker is with this particular kind of investment.
The potential performance of the product should be analyzed under a wide range of market scenarios. Any lack of understanding caused by the failure to make such an analysis could violate the suitability rule, FINRA’s notice said.
Firms need to have formal written procedures to make sure that brokers do not recommend complex products without a thorough vetting.
FINRA’s Suggested List of Questions To Be Asked During Vetting
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- Is the product so complex that it is not transparent?
- Is the product too complex to be suitable?
- Is the product meant for limited or general distribution and how will it be controlled?
- Does the product have a reasonable investment objective given its characteristics?
- Can less complex products achieve the investment objectives?
- Who should avoid this product?
- How does the product improve the firm’s current offerings?
- Are the assumptions that underlie the product sound?
- How will the product’s performance be affected by various market or economic scenarios?
- What scenarios could wipe out the gains the investor may come to expect, such as principal protection or enhanced yield?
- What are the risks for investors, and if the product trades high yield for high risk, does the potential yield justify the risks to principal?
- Does the product present any unusual tax, credit or legal risks?
- Is the broker trained to handle this product? In other words, does the broker understand it?
- How liquid is the investment? Does a secondary market exist for the product?
Responsibilities Continue After Sale
A procedure to approve the sale of complex products will help ensure suitability, but the FINRA notice also said firms need to develop procedures to find out how the products performed after the sale.
Some firms require complex products to be formally tracked for a certain period so the firm can assess performance and detect whether market conditions have increased the risks.
Firms also need to make sure that only those qualified to recommend complex products are doing so, and only to appropriate individuals.
The Guiliano Law Group, P.C.
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If you believe that you have been the victim of misconduct or fraud, contact us for a free consultation. We handle all cases on a contingency fee basis meaning that there is no cost or obligation, unless we are able to make a recovery for you.
