While most investment losses are the result of market forces, says attorney Mitchell S. Ostwald, investors who believe their losses have been the result of wrongful action or fraud ought to know what they can do about it. “This information will hopefully help consumers distinguish between frivolous claims and claims with merit,” says Ostwald, a renowned consumer attorney and owner of the Law Offices of Mitchell S. Ostwald in Sacramento, California. “Stockbrokers do not have a crystal ball and they are not guarantors of investments,” Ostwald explains. “But they do have duties and responsibilities. Investors, for their part, should know what those obligations are before they invest a dime. ”
The following are 7 Duties of Stockbrokers:
1. Fair Dealing: A stockbroker has a fundamental responsibility for fair dealing. The securities industry requires a stockbroker to treat his customer in a fair and honest manner. Stockbrokers are also subject to the rules of self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA). For example, the FINRA Rules of Fair Practice impose the following standard upon brokers: “A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade. ” This standard, along with other FINRA rules, is legally enforceable and is the standard on which investors are supposed to depend.
2. Duty of Loyalty: Because stockbrokers make their money through commissions, an inherent conflict can exist between the broker’s interests and those of the customers. But the broker must always place the interests of the customer first. The duty to the customer must be paramount. For instance, trading frequently can become an issue. The broker should only recommend trades when they meet the needs of the consumer, not merely to generate commissions for himself. Excessive trading by a broker for the sake of increasing commissions is known as “churning,” and it is illegal.
3. Disclosure: A broker also has a duty to disclose all material information related to an investment recommendation – this means all information that may be reasonably relevant to an investor to take into consideration in making an informative investment decision. Also, a broker has an obligation to disclose the various risks on an investment recommendation. Brokers must be truthful in all communications with customers. Essentially, their communications should provide a sound basis for evaluating any recommended securities. Exaggerated, false or misleading statements are flatly prohibited.
4. Trading Authorizations: A broker may not perform activities in a customer’s account unless the customer has approved and authorized the trade in advance, or has given the broker power of attorney to make trading decisions in the account. No unauthorized trading is permitted. On the other hand, however, a broker has no obligation to carry out the customer’s demands.
5. Suitable Recommendations: One of the most important duties is making investment recommendations that are always consistent with the customer’s financial status, investment objectives, level of understanding and risk tolerance. Under the “suitability rule” and the “know your customer” rule, a broker must reasonably believe that the recommendation is appropriate for that particular customer based upon his specific financial situation, understanding and needs. The stockbroker should create an up-to-date customer profile that matches the customer with the appropriate investment.
6. Special Situations: Of course, some investments are riskier than others and may therefore require additional duties of the broker. For example, trading with money borrowed from the brokerage firm, know 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.
7. Supervision and Duty of Good Faith: A brokerage firm has a responsibility to supervise the activities of its brokers. Many customers follow the advice of their broker based upon the reputation of the firm standing behind the broker. Both the stockbroker and brokerage firm have the responsibility to conduct themselves in good faith with customers. Customers automatically trust and rely upon the broker and brokerage firms to operate under the high standards imposed upon the securities profession.
“Customers place their total faith in their broker as a trusted advisor,” says Ostwald. “Usually their financial affairs are in good hands and there is nothing to worry about. But the smart investor understands the broker’s responsibilities and duty of good faith. ”
The preceding material is for general informational purposes only. It is not intended as legal advice, and should not be relied upon in any manner as a substitute for consulting with an attorney. Anyone who believes that they have been a victim of securities fraud or has any legal problem or questions should consult with an attorney regarding the particular facts and circumstances of their situation and potential claims.