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.
"The information in this news release 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. Consumer Law tips is a series of informative news releases aimed at educating consumers and businesses about their rights and duties under the law.
"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. "
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 National Association of Securities Dealers (NASD). For Example, the NASD 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 NASD rules, is legally enforceable as the standard to which investors are entitled 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. To broker should only recommend trades that meet the need 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 execute 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. And, a broker has no obligation to carry out the customer's demands.
5.
Suitable Recommendations: One of the most important duties is that all investment recommendations should be 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 and up-to-date customer profile that matches the customer with the appropriate investment.
6.
Special Situations: Of course, some investments are riskier than other 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.