Research On The Legal Problem Of Suitability Of Financial Product Sale

Under the background of financial crisis, the disputes caused by the sale of financial product between investors and broker-dealers become increasingly outstanding. Appropriate settlement of these disputes is good not only for protection of investor but also for sustaining and healthy development of financial market. However, the judgment made by court on this kind of disputes did not resolve them well.From the perspective of civil law, the legal fact leading to the birth of legal relation about financial product sale is a kind of legal act. If a legal act can have the legal effect according to the subject’s will, two parties must have expressed their true idea during the process of reaching agreement. When court exercise judgment of the disputes between investor and broker-dealer, the justification is doubtful to make judgment that investor assume the loss only if investor sign names in the contract and take the principle of autonomy of will as its justifiable basis, because financial products have the obvious characteristic of profession and confidence. Profession means that investor can not understand the products well due to limitations of knowledge. Confidence means that investors place trust on the broker-dealers who appear as financial experts. This paper try to use suitability doctrine which is popular in American securities law area to balance the relation between investors and broker-dealers better, therefore a new definition of suitability doctrine is made on the basis of the concept of financial product.According to suitability doctrine, a financial broker-dealer should make the judgment that if a product is suitable for a investor based on the special situation of the investor, just like property status, tax status, knowledge background, investment history, investment objectives, etc when a broker-dealer recommend or sell financial product to a investor. A broker-dealer should assume the civil liability for the loss of a investor if broker-dealer exercise no or wrong judgment on the suitability of a financial product. If court takes suitability into consideration during the process of resolving the disputes between investor and broker-dealer, on one hand, investors can be protected better, on the other hand, consideration of suitability can make the judgment which unassisted investor more acceptable. Therefore, suitability doctrine is not to negate the rule of caveat emptor in traditional civil law, but to establish more solid foundation for it.Many factors should be taken into consideration when a broker-dealer exercises judgment of the suitability of a financial product. Among all the factors related to suitability, investment objective is the most important one, because this factor decides a investor’s intention to assume the risk to what degree. Only if the loss is not beyond the expectation of the investor, the financial product can be considered as a suitable one. Broker-dealer’s appropriate introduction of a product is the precondition to ascertain the investment objective of investors. Appropriate introduction means that the broker-dealer should introduce the possible loss in the way which can be understood by the investor well. In China, the most available way to establish suitability rule is to set compulsory articles in the contract of financial product sale.This paper includes the following 6 chapters:In chapter 1, on the basis of understanding in financial area, this paper defines the concept of financial product from the perspective of legal science. The definition is the logical starting-point of this paper and put forward a possibility to establish a universal theory which can be used in all financial product disputes. Meanwhile, analysis is made in this chapter from the perspective of private law, pointing out that the legal relation caused by financial product sale is the same essentially, no matter the identity of broker-dealer is broker or parties of transaction. Both can be considered as legal relation caused by legal act. In practice, attitude of the court on the disputes between investor and broker-dealer is in disfavor of investor according to the rule of caveat emptor.The purpose of chapter 2 is to seek reasonable explanation from traditional civil law theory for the attitude of court. Obviously, court takes the theory of autonomy of will as its foundation. Specifically speaking, the cause that investor assumes the loss is that there is an agreement between investor and broker-dealer due to the signature of two parties. However, during the process of financial product sale, the formal agreement usually can not reflect the true meaning of investors because of the profession of financial product. To make sure the truth of investor’s expression, it is necessary to require broker-dealer to exercise judgment on the suitability of financial product. So suitability doctrine can make up for the theory of autonomy of will.In chapter 3, this paper analyses the birth, evolution, and modern application of suitability doctrine in American securities law area. According to suitability doctrine, broker-dealers are required not only to disclose information adequately but also to exercise judgment on the suitability of product for investors according to the information offered by investors. Initially, requirement of suitability was just self-regulatory, so no civil liability when investors suffered loss because of unsuitability of recommendation or sale. However, for the sake of demand in practice, from 1978, the responsibility of broker-dealers breaking requirement of suitability shifted from moral to legal. And the extent becomes bigger and bigger, the requirement to broker-dealer becomes increasingly strict. Both the broker-dealer recommending securities as a broker and sale securities as a dealer, must satisfy suitability requirement. In America, suit and arbitration are both available for investors to get remedy.In chapter 4, a new definition is put forward at the basis of the concept of financial product in chapter 1. The purpose of this definition is to expand the suitability doctrine to all financial product area. Meanwhile, it tries to find a proper position for suitability doctrine in traditional civil law theory, and to analyze the possible liability when broker-dealer breaks the suitability doctrine in China.In chapter 5, the application of suitability doctrine is discussed. Firstly, the scope of suitability doctrine is limited. Only financial product broker-dealer should satisfy the requirement. Secondly, it discusses the condition of the application of suitability doctrine from three sides including subject, action and consequence. The possible practical value is adequately displayed in this chapter.In chapter 6, the existing regulation rules relating to suitability doctrine are introduced. Meanwhile, it discusses the possible way in resolving the disputes between investors and broker-dealers during the process of judicature.