Suitability – The Sophisticated Investor – And Modern Portfolio Management

Tuesday, January 1st, 1991 at 12:00 am by Stuart D. Root
Stuart D. Root, Suitability – The Sophisticated Investor – And Modern Portfolio Management, 1991 Colum. Bus. L. Rev. 287

The thesis of this article is: The fundamentals of a duty to make “suitable” security recommendations have been developed largely in the context of investors who are not deemed to be “sophisticated.” Much of the same reasoning, however, would apply to those who are so-called “sophisticated.” This is because the judicial imputation of sophistication is unwarranted in the case of investors relying on broker-dealers who possess a better understanding of new investment media, and who have access to far more extensive information affecting securities, their prices, and strategies. Further, the disparity in the information base available to securities dealers and that available, as a practical matter, to investors is likely to become more distinct as greater risks are taken to manage investments under modern portfolio theory. But this gulf also places a prudential responsibility on the investor to communicate its risk profile and investment objectives to the broker-dealer. These articulations frame the scope of the broker-dealer’s suitability duty in a world of increasing investment complexity.

Author Information

A.B., Ohio Wesleyan University (1955); J.D., Columbia School of Law (1960); Admitted N.Y., 1960; Executive Director, Federal Savings and Loan Insurance Corporation, 1987 - 1989; Mr. Root practices law in Bronxville, NY.