COMMON INVESTOR COMPLAINTS
Have you lost money in your investment portfolio? You may have recourse against your stockbroker for:
Unauthorized Transactions
Unsuitable Recommendations
Fraud and Misrepresentation
Excessive Trading Activity
Here are some common investor complaints against stockbrokers and brokerage firms:
Unauthorized Trading Ð Sometimes a customer may be surprised to discover certain trades made in his account that had not been previously discussed with the stockbroker. A broker is prohibited from executing a trade in the account unless the client has approved and authorized the trade, before the trade has been made. The broker may not send trade confirmations in order to cause customers to accept trades not actually agreed upon. Unauthorized trading has also been held to constitute fraud and a violation of federal and state securities laws.
Unsuitable Recommendations Ð The NASD suitability rule requires that the broker's recommendations must be appropriate in light of the customer's financial condition, level of sophistication, investment objectives and risk tolerance. What is a suitable investment for a high income professional may be grossly unsuitable for a retired widow living on a pension. The suitability rule and the closely related "know your customer" rule require that the broker use due diligence to obtain information about the customer's financial situation, needs, objectives and understanding. The standard for suitability must be considered in the circumstances of each case. Violations of the suitability rule may constitute a basis for a breach of contract or negligence action.
Fraud and Misrepresentation Ð A broker cannot misrepresent an investment or fail to reveal material facts that would have been important to the customer in making an investment decision. A stockbroker has a fundamental responsibility for fair dealing. The rules and regulations of the securities industry require a stockbroker to treat his customer in a fair manner characterized by high standards of honesty and integrity. Brokers have a duty to be truthful in all communications with customers. Brokers are held to a standard that their communications should provide a sound basis for evaluating any securities being recommended. In particular, exaggerated, false or misleading statements are prohibited in a stockbroker's communication with the public.
Excessive Trading Activity, also known as "Churning" Ð "Churning" is when an account has an excessive volume and frequency of purchases and sales, and such excessive trading is instigated by the broker to generate commissions without regard to the client's investment objectives.
Unauthorized and Excessive Margin Borrowing Ð "Margin" is money borrowed from the brokerage firm to buy more securities, using securities already owned as collateral for the loan. Even if a customer is authorized to trade on margin, the broker may improperly induce the customer to carry an unreasonably large margin debt.
Breach of Fiduciary Duty Ð Investors are encouraged to place their trust and confidence in their stockbroker. Brokers are therefore held to an extremely high standard not to abuse that trust. Since stockbrokers are compensated through commissions on the transactions that they execute, there is some inherent conflict between the broker's interests and the interests of the customer. It is the broker's responsibility to always place the interests of the customer first. A prime example of the broker's obligation to keep the customers' interests first involves issues of suitability and excessive transactions.
Failure or Refusal to Execute an Order Ð The broker has an obligation to the customer to execute buy and sell orders as given.
Failure to Supervise Ð A brokerage firm has a responsibility to supervise the activities of its brokers. The firm must maintain a system to enforce compliance with the rules and to prevent violations of securities laws and regulations. A brokerage firm must not only show that hey had in place supervisory and compliance rules and procedures, but also that they effectively implemented and enforced their compliance rules and procedures so as to diligently supervise the activities of its brokers.
Use of Insider Information Ð Sometimes a broker may say that he has information from certain sources inside the company that have not been made available to the public. A broker may not use material nonpublic information in recommending the purchase or sale of securities to a customer. Such conduct has been held to violate federal securities laws.
Failure to Diversify or "Overconcentration" Ð It is generally accepted that investment risk can be reduced by diversifying investments among a number of different investments (such as investments in auto stocks, technology stocks and retail stocks), or by diversifying in different types of investments (such as stocks, bonds and mutual funds).
Switching of Mutual Funds Ð Although mutual funds are often viewed as an appropriate investment option, a broker looking to improperly increase his commission may recommend that the customer sell the mutual funds they own and purchase funds offered by a different mutual fund company.
Recommending Purchases Beyond Customer Capability Ð Recommending the purchase of securities or the continuing purchase of securities in amounts that are inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment.
Special Situations Ð Certain forms of investments pose particular problems, and therefore, brokers have additional duties in connection with such activity. For example, trading with money borrowed from the brokerage firm, known as trading on margin, is a carefully regulated activity. Brokers also have special responsibilities in connection with options trading and private placement limited partnerships among other forms of investments.
Have you lost money in your investment portfolio? You may have recourse against your stockbroker for:
Unauthorized Transactions
Unsuitable Recommendations
Fraud and Misrepresentation
Excessive Trading Activity
Here are some common investor complaints against stockbrokers and brokerage firms:
Unauthorized Trading Ð Sometimes a customer may be surprised to discover certain trades made in his account that had not been previously discussed with the stockbroker. A broker is prohibited from executing a trade in the account unless the client has approved and authorized the trade, before the trade has been made. The broker may not send trade confirmations in order to cause customers to accept trades not actually agreed upon. Unauthorized trading has also been held to constitute fraud and a violation of federal and state securities laws.
Unsuitable Recommendations Ð The NASD suitability rule requires that the broker's recommendations must be appropriate in light of the customer's financial condition, level of sophistication, investment objectives and risk tolerance. What is a suitable investment for a high income professional may be grossly unsuitable for a retired widow living on a pension. The suitability rule and the closely related "know your customer" rule require that the broker use due diligence to obtain information about the customer's financial situation, needs, objectives and understanding. The standard for suitability must be considered in the circumstances of each case. Violations of the suitability rule may constitute a basis for a breach of contract or negligence action.
Fraud and Misrepresentation Ð A broker cannot misrepresent an investment or fail to reveal material facts that would have been important to the customer in making an investment decision. A stockbroker has a fundamental responsibility for fair dealing. The rules and regulations of the securities industry require a stockbroker to treat his customer in a fair manner characterized by high standards of honesty and integrity. Brokers have a duty to be truthful in all communications with customers. Brokers are held to a standard that their communications should provide a sound basis for evaluating any securities being recommended. In particular, exaggerated, false or misleading statements are prohibited in a stockbroker's communication with the public.
Excessive Trading Activity, also known as "Churning" Ð "Churning" is when an account has an excessive volume and frequency of purchases and sales, and such excessive trading is instigated by the broker to generate commissions without regard to the client's investment objectives.
Unauthorized and Excessive Margin Borrowing Ð "Margin" is money borrowed from the brokerage firm to buy more securities, using securities already owned as collateral for the loan. Even if a customer is authorized to trade on margin, the broker may improperly induce the customer to carry an unreasonably large margin debt.
Breach of Fiduciary Duty Ð Investors are encouraged to place their trust and confidence in their stockbroker. Brokers are therefore held to an extremely high standard not to abuse that trust. Since stockbrokers are compensated through commissions on the transactions that they execute, there is some inherent conflict between the broker's interests and the interests of the customer. It is the broker's responsibility to always place the interests of the customer first. A prime example of the broker's obligation to keep the customers' interests first involves issues of suitability and excessive transactions.
Failure or Refusal to Execute an Order Ð The broker has an obligation to the customer to execute buy and sell orders as given.
Failure to Supervise Ð A brokerage firm has a responsibility to supervise the activities of its brokers. The firm must maintain a system to enforce compliance with the rules and to prevent violations of securities laws and regulations. A brokerage firm must not only show that hey had in place supervisory and compliance rules and procedures, but also that they effectively implemented and enforced their compliance rules and procedures so as to diligently supervise the activities of its brokers.
Use of Insider Information Ð Sometimes a broker may say that he has information from certain sources inside the company that have not been made available to the public. A broker may not use material nonpublic information in recommending the purchase or sale of securities to a customer. Such conduct has been held to violate federal securities laws.
Failure to Diversify or "Overconcentration" Ð It is generally accepted that investment risk can be reduced by diversifying investments among a number of different investments (such as investments in auto stocks, technology stocks and retail stocks), or by diversifying in different types of investments (such as stocks, bonds and mutual funds).
Switching of Mutual Funds Ð Although mutual funds are often viewed as an appropriate investment option, a broker looking to improperly increase his commission may recommend that the customer sell the mutual funds they own and purchase funds offered by a different mutual fund company.
Recommending Purchases Beyond Customer Capability Ð Recommending the purchase of securities or the continuing purchase of securities in amounts that are inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment.
Special Situations Ð Certain forms of investments pose particular problems, and therefore, brokers have additional duties in connection with such activity. For example, trading with money borrowed from the brokerage firm, known as trading on margin, is a carefully regulated activity. Brokers also have special responsibilities in connection with options trading and private placement limited partnerships among other forms of investments.