FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsHard
A client, aged 72, informs her registered representative that she wants to invest a significant portion of her retirement savings into a highly aggressive growth fund, despite having a low-risk tolerance and needing income for living expenses. The representative advises against it, explaining the risks and unsuitability, but the client insists. What is the representative's most ethical course of action?
- ARefuse to execute the trade, as it is clearly unsuitable for the client.
- BExecute the trade after obtaining a signed waiver from the client acknowledging the risks and unsuitability.
- CSuggest a slightly less aggressive fund that still meets some of the client's growth objectives.
- DExecute the trade as requested by the client, noting the representative's concerns in the client file.
Show answer & explanationAnswer & explanation
Correct answer: A. Refuse to execute the trade, as it is clearly unsuitable for the client.
Under FINRA's suitability rule, a representative has an obligation to recommend only investments that are suitable for the client. If a client insists on an unsuitable investment, the representative's ethical duty is to refuse the transaction. A signed waiver does not absolve the representative or firm of their suitability obligations.
Why the other options are wrong
- B. Waivers do not negate suitability obligations; a representative cannot facilitate an unsuitable transaction simply because a client signs a waiver.
- C. While compromise might seem appealing, if the 'slightly less aggressive' fund is still unsuitable given the client's profile, it's still a violation.
- D. Executing an unsuitable trade, even with documented concerns, does not fulfill the suitability obligation.
Suitability Obligation
Registered representatives must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on the customer's investment profile.
- Based on FINRA Rule 2111 (Suitability).
- Applies to recommendations, not unsolicited orders.
- Customer's profile includes age, financial situation, investment objectives, risk tolerance, etc.
- Representatives cannot simply execute unsuitable trades, even if requested.
Memory trick: Suitability's a shield, not a suggestion; protect the client from poor investment digestion.