Stockbroker Misconduct

What Constitutes Misconduct?
Stockbroker misconduct, or that of investment advisors and other investment professionals, includes a variety of wrongdoing from negligence to outright theft. Common forms of such stockbroker misconduct are the recommendation of unsuitable investments, and breach of fiduciary duty. Other misconduct constitutes stockbroker fraud, and includes misrepresentations or omissions, churning, unauthorized trading, and selling away, which are covered on the investment fraud page.

Stockbrokers have a duty to treat their clients fairly and are required by the FINRA Conduct Rules to “observe high standards of commercial honor and the just and equitable principals of trade.” In addition, whether a stockbroker is handling a client’s account on a discretionary or non-discretionary basis, the stockbroker owes his client a fiduciary duty. Likewise, investment advisors are the fiduciaries of their clients.

Unsuitable Investment Recommendation
When a stockbroker makes an investment recommendation to a client, he must have reasonable grounds to believe that the investment is consistent with the client’s investment objectives, risk tolerance, financial situation, and needs. A stockbroker has an obligation to make reasonable efforts to obtain information concerning a client’s financial status, tax status, investment objectives and risk tolerance. Once a stockbroker has gathered such information, he has a duty to his client to recommend only those investments or trading activities that are suitable or appropriate for the client.

When a client opens an account with a brokerage firm, the firm typically requires the client to sign a customer agreement, and the stockbroker fills out a document commonly referred to as a “new account form.” The new account form includes information concerning the client’s assets, age, investment objectives, risk tolerance, and investment experience. It is the duty of the stockbroker to recommend to the client only investments that are appropriate for the client, considering his or her investment objectives, risk tolerance, financial situation, age, and investment experience.

Common types of unsuitable investment recommendations include the following:

1. Failing to recommend a diversified, properly allocated portfolio for a client living on a fixed income or for a client who is retired.

2. Engaging in trading activities which are too risky for the client, including the use of margin, options trading, or short-term trading;

3. Over-concentrating a client’s investments in one security or one sector of the stock market; and

4. Recommending repetitive switching of variable or equity-indexed annuities;

If a stockbroker breaches his duties to know his client and to make suitable investment recommendations to his client, the stockbroker and the brokerage firm for which the broker works may be liable to the client. A breach of these duties by a broker can serve as a basis for a negligence claim against the broker and the brokerage firm. In addition, under Florida law, the recommendation of unsuitable investments to a client has been recognized as statutory fraud under Chapter 517 of the Florida Statutes.

Breach of Fiduciary Duty
The fiduciary duty is the highest duty imposed by law. It requires the utmost candor, fair dealing, and disclosure by stockbrokers who handle a client’s account on a discretionary basis and by all investment advisors. A stockbroker handles a client’s account on a discretionary basis when the client authorizes the broker in writing to purchase and sell securities for the customer without obtaining customer approval for each transaction.

In addition, a broker owes a fiduciary duty to his client when the broker handles the client’s investments on a non-discretionary basis by obtaining the approval of the customer for each securities transaction undertaken. The fiduciary duty of the broker with respect to a non-discretionary account includes the following responsibilities:

1. The duty to recommend a stock only after studying it sufficiently to become informed as to its nature, price, and financial prognosis;

2. The duty to carry out the customer’s orders promptly and in a manner best suited to serve the customer’s interests;

3. The duty to inform the customer of the risks involved in purchasing or selling a particular security;

4. The duty to refrain from self-dealing;

5. The duty not to misrepresent any material facts to the transactions; and

6. The duty to transact business only after receiving authorization from the customer.

A broker or investment advisor who violates his fiduciary duties to his client and the brokerage firm or investment advisory firm for which the broker or investment advisor works may be liable to the client for losses suffered as a result of the breach of any of these fiduciary duties.

Evaluating Your Claim
If you are uncertain whether your investment losses may have been due to some form of stockbroker misconduct, we can help. Contact me for an evaluation of your potential claim. I will assess the merits of your case and if appropriate, arrange a consultation to discuss your options. There is no charge.