Dealing With Your Securities Broker When Things
Your Legal Rights and Remedies
Representing Aggrieved Investors Nationwide
If you have any questions or a possible case; do
not hesitate in contacting us:
A. FINDING A SECURITIES BROKER
It's your money. Do you have reason to trust
him/her and the company he/she works for?
1. What you should learn about a securities
(a) What is his education?
(b) What professional licenses does he have?
Is he a licensed "registered representative" whose
activities are regulated by the SEC, the National Association
of Securities Dealers, Inc. ("NASD") and your
state's Blue Sky Commissioner?
(c) What is his experience in the business?
(d) How does he get paid? If it is sales
commissions, he doesn't get paid if he doesn't make the sale.
(Most brokers are paid by commission. This creates a conflict
of interest as the broker gets paid on every transaction that
he does for you, whether or not the transaction is in your
(e) Financial Consultant, Financial Adviser,
and the like have no legal meaning. (Almost everyone is a Vice
(f) What is a Financial Planner, Certified
Financial, or Chartered Financial Planner? (Certified
Financial Planner and Chartered Financial Planner require
additional tests of competency over and above the regular
securities exams [Series 7 and maybe a Series 63] required to
be a stockbroker.)
2. Who does he work for?
(a) Is his company a licensed securities
broker regulated by the SEC, the NASD, and your state's Blue
Sky Commission? Is the company a member of a securities
exchange such as the New York Stock Exchange? Do you care?
(Most investors feel more comfortable buying investments from
3. Establish your investment objectives.
(a) Bear in mind there is a risk in every
investment. The higher the potential return, the higher the
risk. Things that sound too good to be true generally are.
(b) Do you want income, long term growth,
liquidity? (Make sure your broker understands.)
(c) Are you willing to speculate? (Make sure
your broker understands.)
4. Lean about the specific securities in which
you invest. The key is: Do you understand what you are buying?
(If you do not understand it - don't buy it.)
(a) Does the security fit your goals? (Short
term trading does not meet the goals of the long term
(b) What is the relationship between the
broker and/or the company he works for and the company that
issued the security you are investing in? (This may create a
conflict of interest - watch out!)
(c) Is the security a bond, debenture,
preferred stock, option, mutual fund or limited partnership?
Is it a derivative or hybrid? ("Sophisticated" and
"speculative" are dangerous words.)
(d) Is the investment registered with the SEC?
Is it legally tradeable? How long after the purchase can you
sell it? As a practical matter, will there be a real market
for it? What market?
5.Look up your broker's complaint history at the
NASD site (www.nasdr.com).
B. Your Broker's Responsibility to You
In most states, when a securities broker
"hangs out his shingle" he undertakes a fiduciary duty
to his customers. In all states, he represents that he will deal
fairly and in accordance with the standards of his profession.
1. A broker has an obligation to "know his
customer." He must learn your financial circumstances so
that he can properly recommend securities.
2. He must account for your money. He does this
through periodic statements and confirmation slips of each
transaction. Read them. Get an explanation if you don't
understand them. If your broker's explanation is unsatisfactory,
talk to his manager.
3. No half-truths. He must not make any untrue
statement of a material fact, and must not omit to state a
material fact necessary to make the statements made not
misleading in light of the circumstances under which they are
C. Your Responsibility in the Securities
1. You must act as a reasonably prudent
investor. Don't check your brains at the door. Ask all the
questions you want and feel comfortable that you understand what
you are doing.
2. Don't misrepresent your financial
circumstances and don't allow the broker to fill out anything
stating a false financial history. Read and understand what you
sign. Don't sign blank forms.
D. Common Scenarios of Stockbroker Misconduct
1. Unsuitable Recommendations. Because
stockbrokers serve in a fiduciary capacity, they are obligated
to recommend to their customers only those transactions which
are "suitable" for the given customer's financial
situation and needs. Simply put, the stockbroker must act in the
best interests of the customer and not induce them to make
trades in a manner that is inconsistent with their investment
goals and the risk they want or can afford to take. Be alert for
recommendations to make a dramatic change in your investment
strategy, such as moving from low risk investments to
speculative securities, or concentrating investments exclusively
in a single product.
2. Trading to Earn Commissions. The broker must
recommend a security on its own merit, not principally on the
ground that his employer is the sponsor (makes a market) of the
security and he (the broker) will get a higher percentage of the
commission by selling you a house-sponsored security.
3. Churning. Churning, a common offense, is when
a stockbroker induces his client to enter into excessive or
frequent trading so that the stockbroker will receive greater
commissions. An excessive number of transactions in your account
generates more commissions for your broker, but may provide no
better investment opportunities for you. Also, unless there is a
legitimate investment purpose for switching your investment in a
mutual fund to a different fund with the same or similar
investment objectives, a switch recommended by your sales
representative may simply be an attempt to generate additional
commissions for the broker.
4. Misleading Statements of Material Facts
(FRAUD). It is unlawful for a broker to make any untrue
statement of a material fact or fail to disclose a material fact
which would mislead the client. You should be alert for
recommendations from your sales representative that are based on
so called "inside" or "confidential
information," an "upcoming favorable research
report," a "prospective merger or acquisition",
or "I have a friend at the company", as well as the
announcement of a "dynamic new product". Also beware
of representations that your investment will "double"
within a short period of time or of any "guarantees"
that you will not lose money.
5. Manipulation. This is when the broker uses
your money (and the money of others) in transactions intended to
influence the price of a security on the public market so that
it is not a reflection of the true purchases and sales.
6. Unauthorized and Improperly Executed
Transactions. An unauthorized transaction occurs when the
stockbroker executes a transaction without obtaining the
customer's prior consent. An improperly executed transaction
arises when the broker fails to follow the customer's
directions. For example, a broker buys when instructed to sell
or a trade that was made in the wrong security or at the wrong
quantity or price. Sometimes the broker might say that he tried
calling you, but this was such a good opportunity, you had to
have it in your account. Be suspicious of any excuses from your
broker that such problems are simply due to a computer or
7. Failure to Supervise. A brokerage house has
the obligation to supervise its brokers to make sure they are
not violating the rules of professional conduct and make sure
that none of the conduct described here has occurred. Failure to
closely supervise makes the brokerage house liable to the same
extent as the broker.
8. Conversion. Occasionally brokers outright
misappropriate funds or securities entrusted to them by their
customers (stealing). This is also illegal.
9. Excessive Mark-Ups. When the broker acts as a
principal and/or market maker and sells a security to you, he
cannot charge you a mark-up which is excessive given a fair
market. When he purchases a security from you, he cannot
purchase at a discount which is excessive given a fair market
E. Other Things You Should Know
1. Statutes of Limitations. Don't delay. A
statute of limitations is the time period in which you must
bring a claim, or the claim is forever barred. The statute of
limitations depends on the state in which you live as well as
your particular circumstances. In short, get help right away to
make sure that your claim is not barred.
2. Forum. Most modern account opening agreements
with brokerage houses require that customer disputes be
arbitrated in arbitration proceedings administered by the NASD
or a stock exchange. You still have the right to an attorney.
Arbitration awards are enforceable.
3. The Chances of Success. As most disputes are
heard in arbitration instead of court proceedings, there are no
statistics on success in these types of cases. In arbitration,
recent statistics show that most of the customer cases are
settled before hearing with smaller cases settled more
frequently. If you don't settle, statistics show that about 60%
of the cases end up with some type of recovery to the customer.
Even though there can never be a guarantee that you will recover
anything, statistically, cases in which the customer retains
legal counsel produce better results.
|The Law Offices of
Solomon, Saltsman & Jamieson hope you find these
resources useful and informative.