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Prohibited Conduct of Stockbrokers
ational Association of Securities Dealers Regulation (NASDR) has published an informative booklet for investors entitled "Investor Complaint Program". Among other topics, the booklet discusses the recovery of investment losses and the prohibited conduct of stockbrokers.
Preliminarily, NASDR states that not every loss in an investment means that a broker has committed misconduct such that an investor would be entitled to recover his or her investment losses in arbitration or otherwise. But many types of conduct are prohibited. The booklet provides the following examples:
- Recommending to an investor the purchase or sale of a security that is unsuitable given the investor's age, financial situation, investment objective, and investment experience. Investment in a particular type of security may be unsuitable or the amount or frequency of transactions may be excessive and therefore unsuitable for a given investor.
- Purchasing or selling securities in a investor's account without first contacting the investor … to specifically authorize the sale or purchase, unless the broker has received from the investor written discretionary authority to effect transactions in the account or the broker was given discretion as to price and time.
- Switching an investor from one mutual fund to another when there is no legitimate investment purpose for the switch.
- Misrepresenting or failing to disclose material facts concerning an investment. Examples of information that may be considered material and that should be accurately presented to investors include: the risks of investing in a particular security; the charges or fees involved; company financial information; and technical or analytical information, such as bond ratings.
- Removing funds or securities from an investor's account without the investor's prior authorization.
- Charging an investor excessive markups, markdowns or commissions on the purchase or sale of securities.
- Guaranteeing investors that they will not lose money on a particular securities transaction, making specific price predictions, or agreeing to share in any losses in the investor's account.
- Private securities transactions between a broker and a investor that may violate NASD rules, particularly where such transactions are done without prior knowledge and permission of the sales representative's firm.
- Trading for a firm's account in preference to an investor by trading ahead of an investor limit order in its published quotes, absent a valid exception.
- Failure by a market maker to display an investor limit order in its published quotes, absent a valid exception.
- Failing to use reasonable diligence to see that an investor's order is executed at the best possible price, given prevailing market conditions.
- Purchasing or selling a security while in possession of material, non-public information regarding an issuer.
- Using any manipulative, deceptive, or other fraudulent device or contrivance to effect any transaction in, or induce the purchase or sale of, any security.
NASDR's booklet also discusses how investors can avoid problems. For example, NASDR advises investors to thoroughly read and retain monthly account statements, confirmations and other information describing their investments. Second, investors immediately should question any transactions or entries that are not understood or are not authorized, if necessary complaining to the firm's branch manager or compliance department. NASDR suggests complaining in writing, and following up if the response is unsatisfactory.
Additionally, investors should understand their investments completely. They should not buy "penny stocks" without knowing the great risk of doing so. Investors should be wary of sales pitches making exaggerated claims about profitability. Investors should not accept any recommendation from a broker who pressures them to invest quickly to avoid missing a "lifetime opportunity".
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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is the immediate past co-chair of the Chicago Bar Association's Securities Law Committee, the immediate past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He can be reached at 312-641-2929. The firm's website, www.FinancialCounsel.com, contains global market intelligence, daily financial news, alerts, articles, studies, a calendar of upcoming seminars and events, portfolio "diagnostics" tools and book recommendations.
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