Stockbroker Misconduct

People open brokerage accounts for a variety of reasons. Perhaps to invest for long term goals such as retirement. Maybe to invest for shorter term goals such as buying a house or paying for a child’s college education. Maybe you want to dabble in the market for fun. Whatever your reason for opening a brokerage account you don’t expect to be misled, mistreated, or have your account mishandled.


Unsuitable Recommendations
Brokers have an obligation to determine their client’s needs and only recommend investments that are suitable in light of those needs. Brokers are required to find out essential information about their client’s finances such as income, net worth, previous investment experience and investment objectives. Client goals must be evaluated in conjunction with the level of risk that client is able to accept. Investments should be diversified in order to avoid the risk of undue concentration, whether that be in a particular company or a specific industry. Brokers must have a reasonable basis for making a recommendation to buy or sell, or to not buy or sell, securities, and that recommendation must be based upon what is suitable for that particular client.

Brokers have a duty to provide their client with all relevant information with respect to the investments which the broker recommends. Providing some, but not all important information, does not satisfy the requirement that all relevant information be provided. Brokers must not only provide the good news, but the bad as well.

Unauthorized Trading
Brokers must get their client’s permission prior to buying or selling any investment. If a broker makes a trade on their client’s behalf without first receiving permission, the trade is unauthorized and is subject to being reversed. Ordinarily, the broker must receive permission prior to executing every trade. The exception to this rule is the situation where the client has previously given the broker “discretionary authority”. In other words, the broker has permission to buy or sell whatever and whenever the broker decides. This is rarely a good idea.
Its important for clients to review the statements they receive from their brokerage firm. If a client sees that unauthorized trades have taken place in their account and they don’t immediately complain about the trades, they may be deemed to have accepted or “ratified” the trade. In that event the client may not be successful in having the trade reversed.

In most cases stockbrokers are compensated by receiving commissions. Purchases and sales generate a commission. The more purchases and sales, the more commissions. That is simply the way the brokerage business operates. The problem arises from the fact that there is a built-in conflict of interest between the broker and the client. Its in the broker’s best interest to trade as often as possible. It is in the client’s best interest to only trade to achieve a legitimate investment objective. Excessive trading by a broker is wrong even if the account makes money.

Failure to Supervise
Every broker has a supervisor. One of the duties of that supervisor is to make sure that client accounts are being managed properly. Accounts must be reviewed periodically to ensure that the activity in the account is appropriate given the investment objectives and needs of the client. Each trade in an account must be reviewed by a supervisor. Brokerage firms are responsible for making sure that each account is adequately supervised.

If any of the forms of wrongdoing listed above have occurred in your account, you may be entitled to recovery from your brokerage firm.