The FNMA Suitability Test: If my aunt were a man, she'd be my uncle

October 14, 2011

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2010, Claimants ultimately sought $359,268.49 in compensatory damages, and additional punitive damages arising from their investments in Fannie Mae ("FNMA") securities. In the Matter of the FINRA Arbitration Between James D. Brogden, Trustee of the Jim Brogden Revocable Living Trust and Frances L. Brogden, Trustee of the Lynn Brogden Revocable Living Trust, Claimants, v. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Randall Wayne Slender, Respondents (FINRA Arbitration 10-01725, October 4, 2011). 

Respondents generally denied the allegations, asserted various affirmative defenses, and sought a recommendation of expungement of this arbitration from Respondent Stender's Central Registration Depository record  ("CRD").


The FINRA Arbitration Panel found that:

The recommended investment was suitable in every way except that the quantity of shares recommended made a portion (40%) of the investment unsuitable given the investors' risk tolerance at the time of purchase. 

Accordingly, the FINRA Arbitration Panel found Respondents jointly and severally liable to and ordered them to pay to Claimants: 

  • $96,049.31 in compensatory damages;
  • $33,287.67 as pre-judgment interest owed through June 14, 2011;
  • $96,049.31 in simple interest at the rate of 9% per annum accruing from June 15, 2011, until the award of compensatory damages is paid;
  • $60,346.80 in attorneys' fees plus simple interest at the rate of 9% until full payment; and
  • $300.00 reimbursement simple interest at the rate of 9% until full payment for the non-refundable portion of the initial claim filing fee previously paid to FINRA Dispute Resolution. 

Additionally, the Panel denied the request to expunge Respondent Stender's CRD.

Bill Singer's Comment

A common quote that folks often hear from me is "If my aunt were a man, she'd be my uncle."  That line comes up in my conversations with potential law clients when someone in trouble asks how different my opinion would be if they hadn't actually done what they did but had done something different.

In this FINRA arbitration, my oft-spoken admonition about male aunts is particularly apt.  Although I understand this FINRA Arbitration Panel's Decision, frankly, when I read this explanation, I laughed:

The recommended investment was suitable in every way except that the quantity of shares recommended made a portion (40%) of the investment unsuitable given the investors' risk tolerance at the time of purchase.

Lemme see here - first, the Panel proclaims that the disputed FNMA investment was "suitable in every way . . ."  Unfortunately that seemingly comprehensive and conclusive pronouncement is followed by that troublesome word "except." From that point, we are presented with the illogical logic that the FNMA investment was absolutely suitable except that it wasn't because the purportedly suitable investment  involved a recommendation of an excessive "quantity of shares" and, therefore, this over-concentration of shares rendered the investment unsuitable - ah, my male aunt!

SIDE BAR:  Here's the wording of FINRA's "Suitability" Rule:

NASD Conduct Rule 2310. Recommendations to Customers (Suitability)

(a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.

(b) Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:

(1) the customer's financial status;

(2) the customer's tax status;

(3) the customer's investment objectives; and

(4) such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.

(c) For purposes of this Rule, the term "non-institutional customer" shall mean a customer that does not qualify as an "institutional account" under Rule 3110(c)(4).

I mean, geez, of course a given stock may be a very fine investment - let's say, for example, Apple at $390 a share, or thereabouts.  On the other hand, suitability considerations do not occur in a vacuum - if I'm a 90-year-old investor with $3,900 in the bank and living off of social security, it's not likely to be "suitable" for a stockbroker to recommend that I purchase 20 shares of AAPL on margin. 

Of course, if the 90-year-old investor were a 20-year-old investor with $3.9 million in the bank rather than $3,900, then the recommended 20 shares of AAPL on margin might well be perfectly suitable - but for the fact that, you know, the 90 year old is 90 and the $3,900 in the bank is $3,900.  You got it: if my aunt were a man, she'd be my uncle!