Researches On The Suitability Principle And Institutionalization In Securities Market

Nowadays, with the growing complexity of securities investment products structure and increasing risk of securities investments, a high level professional ability is inevitable requirement in the field of securities investments. However, whether in the information-gathering capability, or investment analysis ability, the magnitude of gap between the ordinary investors and the broker-dealers with great professional advantages is quite beyond our imagination. Under such circumstance, more and more investers are turning increasingly dependent on the recommendation of the broker-dealer when they select the relevant product or service in securities market. The recommendation of the broker-dealer is gradually turning one of the most important considerations when the securities investors make their final investment decision. In the meantime, the broker-dealers always recommend the unsuitable investment products to the investors to gaining a lot more profits, regardless of the personal information of every investor, which lead to the inestimable loss of the investors as a result. The phenomenon that I have described in the previous article is not uncommon, which means explanation obligation and risk disclosure obligation given to the broker-dealers are never be a perfect measure to prevent the broker-dealers’unsuitable recommendations. Because of this, the legitimate rights and interests of investors can not be protect without an effective legal means adequately. Under this circumstance that securities investors need to be protect from unsuitable recommendations, the suitability principle was bron in the United States. After a period of time, other countries and regions, like European Union and Japan, which own an sophisticated developed securities market, all have introduced the suitability principle to the field of securities products investment one by another. At the same time, these countries and regions have tried their utmost to practised the institutionalization of this suitability principle, for purpose of strengthening the protection of investors’legitimate rights and interests by asking the broker-dealers to take the suitable recommendation obligations. On the basis of the existing related normative documents, we can find that the People’s Republic of China has introduced the suitability principle. Despite all this, there are lots of shortcomings we can find when our country attempts to institutionalize the suitability principle. Therefore, to perfecting the further suitability rule in the field of securities investment in our country, it is necessary to conclude domestic existing related normative documents, analyze the deficiencies, and summarize the successful experience of abroad.The first part of this article introduces the basic theory of the suitability principle in the securities market in three major aspects. First of all, this article gives a definition of the suitability principle based on concluding and summarizing the definitions given by the related normative documents of abroad. In the second place, this article pays attention to the different roles that the broker-dealers play when the investors make their final investment decisions. The securities intermediary may be a securities dealer or an investment service provider in a different case. Then this article makes a analysis of the legal relationship in these different cases. At the last of this part, the article discusses the theoretical basis of the suitability principle. And this discussion is based on two angles of view, which is the legal system of the United States and the legal system of our country. There is no sense in researching the institutionalization of the suitability principle if we can not find its theoretical basis.Foreign stones may serve to polish domestic jade. The second part of this article, in a horizontal way, make a comparative study on the relevant provisions of the suitability principle in the countries and regions with an sophisticated developed securities market. The institutionalization of the suitability principle in the United States is practised by self-regulatory organizations, from NASD to FINRA. In European Union, the institutionalization of the suitability principle is reflected in "Markets in Financial Instruments Directive". While Japan institutionalize the suitability principle by a series of legislative practice. At the last of this part, this article summarizes the common grounds and the different grounds of the suitability rules in the countries and regions above-mentioned, from the aspects of the legislation model, Investors classification system, concrete contents of suitability rule, responsibilities of the broker-dealers, means of relief, etc. This article tries to find the worth learning places of the suitability rule by such study above-mentioned.The institutionalization of the suitability principle of our country is still on the starting stage. The third part of this article focuses on the existing related normative documents of the suitability principle in our country. This article systemizes the suitability rules that is existed in the legal system of China’s securities market from two aspects, which are general rule and specific rule. The specific rule still can be subdivided into two kinds, the rule about the security products sale by the broker-dealers and the rule about the investment sevice provided by the broker-dealers. Based on the study of the existing related normative documents, this article comes up with some disadvantages in the institutionalization of the suitability principle through empirical research, including lower level of legislation, disorder in the investors classification system, skimble-scamble and oversimplified contents of the suitable recommendation obligations given to the broker-dealers, lacking of means of relief for investors and so on.The forth part is the essences of this article. And this part is strongly connected to the second part and third part of this article. In the last part, this article proposed in four aspects to perfecting the institutionalization of the suitability principle in our country. In the first place, we should confirm the legal position of the suitability rule in the legal system of our country. In the second place, the investors classification system need to be unified because a standard will provide a great convenience. In the third place, the contents of the suitable recommendation obligations given to the broker-dealers need to be clearer and more specific. Last but not least, for the purpose of protecting the investors, it is necessary to prescribe the civil liability of the broker-dealers for violating the suitability rules and provide multiple and effective means of relief for investors.This article ended with a brief summary of the structure of writing.