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Know Your Broker - Investors Can Fight Back
Investor Information
June 12 2007

What can I do if my stockbroker has acted improperly? That question is frequently posed by frustrated investors. Take heart. Investors who purchase securities through a brokerage firm may have recourse against a broker or the firm. The key is in knowing what those rights are, when they arise, and how to pursue them.



The rights of the investor parallel the responsibilities of the broker. So



An investor is entitled to accurate material information about a company - the broker is obligated to provide it, without omitting important details or fabricating facts.
An investor is expected to provide accurate information to his financial advisor – age, financial condition, investment objectives, investing experience. The broker is compelled to recommend investments that are suitable for that investor.
An investor is entitled to participate in decisions to purchase or sell securities, unless he or she has delegated discretion to the broker. A broker is required to obtain the investor’s consent before executing trades.
A brokerage firm is obliged to avoid deceptive practices. And, of course, the investor has a right to be free from deception.


These are just a few examples of situations that may give rise to a customer’s claim against a broker. Unfortunately, there are more. With that in mind, StockPatrol.com is pleased to introduce a new series of articles, which we are calling “Know Your Broker.” We will be providing an in-depth look at the variety of misconduct that may give rise to a claim by a customer against a broker.



First, however, it will be helpful to understand the process that investors are obligated to follow if they wish to pursue such claims. In most instances, the customer will be required to submit a dispute to arbitration.



Federal and state securities laws prohibit fraudulent activities in connection with the sale of securities. The law also protects securities customers against more routine problems, such as negligence and breach of contract. And brokers can be held accountable when they fail to comply with industry rules and acceptable standards.



Where can customers go when they feel they have been wronged by a broker or brokerage firm? Although federal courts have jurisdiction over most securities-related claims, brokerage firms, almost universally, require their customers to submit all claims to arbitration. Brokerage firms routinely include such arbitration provisions in their customer agreements, margin agreements and options agreements. If an investor wishes to do business with the brokerage firm, he or she is compelled to sign those agreements. In 1987, the United States Supreme Court ruled that such arbitration provisions are enforceable, so, for the past 20 years, brokerage customers generally have found themselves before arbitrators rather than judges and juries.



Arbitrations are conducted under the auspices of the NASD, New York Stock Exchange or American Stock Exchange (although the NASD and NYSE recently announced plans to combine these operations). NASD, which oversees the vast preponderance of these disputes, schedules proceedings in about 48 cities around the U.S. Hearings generally are held at the location which is closest to the customer’s home or office.



Claims of $25,000 or more are heard by a panel of three arbitrators selected by the parties – two “public” arbitrators and one industry arbitrator. Public arbitrators may be attorneys, business professionals or other independent individuals – provided they are not currently or recently employed in the securities industry. Each party reviews a list of potential arbitrators provided by NASD. If the customer and brokerage firm cannot agree on arbitrators, NASD appoints an arbitrator, who can only be removed for good cause or conflict of interest.



As a practical matter, arbitration is an efficient and cost-effective. Most arbitrations proceed from complaint to resolution in 12 to 18 months, far more quickly than court proceedings.



Although investor advocates initially were concerned that arbitrators might favor securities professionals, arbitration has proven to be a fair mechanism affording aggrieved customers an adequate opportunity to address their problems and, where appropriate, to recover losses. In the end, the outcome – favorable or not – will be dictated by the facts. According to NASD statistics, more than 60% of the hearings result in favorable outcomes for customers. And many arbitration actions are settled before a hearing – or as a result of mediation.



Arbitration may be faster and more economical than traditional litigation, but there is one critical distinction that cannot be ignored. The outcome of a trial can be appealed. Arbitration decisions, on the other hand, are final, and can only be appealed under the most limited circumstances, such as where there has been fraud in the arbitration process. So customers need to use due care when preparing for a hearing.



On a related note, investors are not required to be represented by an attorney at arbitration – but they should be aware that the brokerage firm and investment professional will almost always be represented by experienced, competent legal counsel. Arbitration is less formal than traditional litigation, but a hearing is conducted under rules that include examination of witnesses and production of documentary evidence. Investors without attorneys are likely to be at a significant disadvantage.



That, in a nutshell, is the arbitration process. Are there other avenues available to aggrieved investors? Customers who have not signed arbitration agreements may still have the right to seek relief through the courts – against brokers, investment advisors or companies.



In future installments of this series we will look at specific acts of misconduct that may give rise to a claim against a broker. If there is a particular area you would like to see explained, please let us know.



And, as always, we welcome questions from our readers.




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