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CALIFORNIA CORPORATE & SECURITIES LAW

Suitability Of Broker-Dealer Recommendations And Litotes

The Financial Industry Regulatory Authority, better known as FINRA, imposes a suitability requirement on its members.  Rule 2111(a) requires, in part, that a broker-dealer or registered representative “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer” based on the customer’s investment profile.  According to FINRA, this suitability requirement is “fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct”.

It is interesting to compare FINRA Rule 2111(a) with the Department of Business Oversight’s rule governing broker-dealers:

Any broker-dealer and any agent employed by such a broker-dealer who recommends to a customer the purchase, sale or exchange of any security shall have reasonable grounds to believe that the recommendation is not unsuitable for such customer on the basis of information furnished by such customer after reasonable inquiry concerning the customer’s investment objectives, financial situation and needs, and any other information known by such broker-dealer or agent.

10 CCR § 260.218.2.  Although the DBO and FINRA rules appear to be imposing the same requirement, there is a subtle difference.  FINRA requires an affirmative belief in suitability while the DBO requires a belief that the recommendation be “not unsuitable”.  Are these differences substantive?

The California rule utilizes litotes – a figure of speech that seeks to affirm the positive by denying the negative.  Despite the unusual name, litotes is commonly used.  Ask someone how they are doing, and you are likely to hear “not bad”.

Litotes plain and simple

“Litotes” is derived from the Greek word, λιτότης, meaning plainness or simplicity.  Litotes, however, is not without ambiguity.  As Judge Frank H. Easterbrook observed:

“Not unlike” can mean almost anything; although the listener may cancel the negatives to obtain “like,” the author may want to convey some difference between “like” and “not unlike.” Speakers and writers alike would do well to heed the advice: “Beware the unappealing trick of not un ___, a kind of litotes that convolutes lawyers’ language. Swear off using it by saying to yourself, `A not unblack dog was chasing a not unsmall rabbit across a not ungreen field.'” Bryan A. Garner, The Elements of Legal Style 155 (1991), quoting from George Orwell, Politics and the English Language, in 4 Collected Essays, Journalism and Letters of George Orwell 127, 138 (1968).

Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc. 3 F.3d 208 (7th Cir. 1993).

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