On July 11, 2019, the U.S. District Court for the District of Minnesota granted a brokerage firm ("Broker") motion for summary judgment in a class action filed by customers alleging the loss of approximately $1.1 million from the purchase of reverse convertible notes ("RCNs"). Investors claimed that Broker was subject to but failed to abide by FINRA regulations in the sale of the RCNs, thereby making Broker liable for breach of contract.

The class action specifically concerned one FINRA rule and three FINRA Notices to Members ("NTMs"), including Rule 2111, NTM 5-59, NTM 10-09 and NTM 12-03. FINRA Rule 2111(a), also known as the "suitability" rule, provides that FINRA-regulated brokers "must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer." NTM 5-59, NTM 10-09 and NTM 12-03 provide guidance as to how Rule 2111 should apply to the sale of structured products. At the motion to dismiss stage of the case, the Court found that the plaintiffs stated a plausible breach of contract claim. However, in light of evidence gathered during discovery, the Court determined that the plain language of an account opening agreement did not require Broker to abide by Rule 2111 and the relevant FINRA guidance. Consequently, Broker could not be held liable for breaching a non-existent contractual duty.

Originally published in REVERSEinquiries: Volume 2, Issue 7.
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