Melbourne Law School - Theses

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Subject: Law and legislation × Subject: Australia × Type: Coursework thesis × Author: Fielder, Helen June ×

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    The suitability rule : a critical analysis of section 851 of the Corporations Law
    Fielder, Helen June ( 1991)
    A securities adviser must tailor his investment recommendations to the investment objectives, financial situation and particular needs of his client. In the United States, this has become known as the 'Suitability Rule', imposed by the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and, until recently, the Securities and Exchange Commission (SEC). In Australia, we have gone further than , developing mere suitability rules. We have developed a statutory obligation under the guise of section 851 of the Corporations Law (CL), which imposes a suitability obligation on securities advisers who make recommendations to investors. However, the 'Suitability Rule' remains, in Australia at least, an amorphous concept. There have been no recorded cases to determine what are the securities adviser's duties under our suitability provision. The Suitability Sules adopted by the NASD, the SEC and the NYSE themselves differ significantly. Can the Australian Courts draw on the American experience as a guide in Australia's embryonic development of a securities advisers independent duty under our legislation? Chapter 1 of this paper will consider the relationship between the securities adviser and the investor. Chapter 2 will trace the development of the Suitability Rule in Australia and the United States. Chapter 3 will examine the rationale behind the Suitability Rule. Chapter 4 will discuss the application of the Suitability Rule and what control it has over securities advisers who make recommendations. Finally, this paper will consider whether the Suitability Rule should be redefined to further enhance investor protection.