A client, a 60-year-old retired individual with a modest pension, informs their registered representative that they want to invest 75% of their liquid assets into a single speculative penny stock, believing it will 'make them rich quickly.' The representative knows this is inconsistent with the client's financial situation and stated objective of income and capital preservation. What is the MOST appropriate action for the registered representative?
- AExecute the order as requested, as it is an unsolicited order and the client has the final say.
- BRefuse to execute the order, as it is clearly unsuitable for the client.
- CExplain the risks of penny stocks and concentration, recommend against the investment, and if the client insists, document the unsolicited order and its unsuitability.
- DExecute the order after obtaining a signed waiver from the client acknowledging the risks and absolving the firm of responsibility.
Show answer & explanationAnswer & explanation
Correct answer: C. Explain the risks of penny stocks and concentration, recommend against the investment, and if the client insists, document the unsolicited order and its unsuitability.
FINRA rules require representatives to make suitability determinations. Even for unsolicited orders, if an investment is clearly unsuitable, the representative must advise against it and document the client's insistence. Refusing the order outright is generally not required unless the firm has a specific policy against it or the activity is illegal/fraudulent. A waiver is not a substitute for suitability obligations.
Why the other options are wrong
- A. Executing an unsolicited but clearly unsuitable order without advising against it and documenting the unsuitability would be a violation of suitability rules.
- B. While the order is unsuitable, representatives generally cannot refuse to execute an unsolicited order unless it's illegal, fraudulent, or violates firm policy. The primary duty is to advise and document.
- D. A signed waiver does not absolve the firm or representative of their suitability obligations. FINRA rules do not permit using waivers to bypass suitability requirements.
Unsuitable Unsolicited Order
An investment order initiated by the client that is inconsistent with their financial situation or investment objectives, requiring the representative to advise against it and document the interaction.
- Representative must explain risks and recommend against.
- Order must be documented as unsolicited and unsuitable if executed.
- Firm/rep still has suitability obligations; waivers are not a solution.
Memory trick: Advise, Document, and Disclose Risks