Home :: Typical Claims Asserted Against Stockbrokers
Typical Claims
- Product Cases
"Product Cases" take on many forms. By their nature, Product Cases usually involve some sort of very complex security, often in the form of a hedge fund, a limited partnership, or a mutual fund. Because of the complexity of the product, the investor, and sometimes the stockbroker/Financial Advisor, does not understand the underlying strategies, or the risks attendant to the strategies. When the strategy and risks are misrepresented to the investor, a claim may exist under different theories, including negligent misrepresentation and fraud. - Breach of Fiduciary Duty:
A New York Stock Exchange publication, Content Outline for the General Securities Registered Representative Examination (Test Series 7), identifies a stockbroker/Financial Advisor’s "Critical Functions and Tasks". For a pdf of the entire Critical Functions and Tasks of the Registered Representative, click here. - Unsuitability:
The unsuitability doctrine is premised upon the New York Stock Exchange’s Know Your Customer Rule and the Financial Industry Regulatory Authority’s Rules of Fair Practice. The essence of an “unsuitability” claim is that the stockbroker/Financial Advisor recommended the purchase of securities that were inconsistent with the customer’s needs, objectives, or risk tolerance.
The types of investments that are subject to claims of unsuitability include, but are not limited to, hedge funds, variable annuities, fixed annuities, fee based managed accounts, mutual funds, closed end funds, stocks, exchange traded funds, municipal bonds and corporate bonds. - Churning
Churning, in its most basic form, ‘occurs when a stockbroker buys and sells securities for a customer’s account, without regard to the customer’s investment interests, for the purpose of generating commissions.’ Churning can involve most any kind of security, including stocks, options, bonds, mutual funds, and variable annuities. - Unauthorized Trading
Unauthorized trading occurs when the stockbroker fails to obtain the customer’s advance authorization to purchase or sell a security. A stockbroker may not exercise discretion without written authorization. - Unregistered Stockbrokers and Unregistered Sales Assistants:
Stockbrokers and certain sales assistants are required by law to be registered with FINRA and with state regulators. Where either person is not registered when they are required to be registered, a customer may have the right to rescind a purchase or sale. - Unregistered Securities:
Where an investor purchases securities that are unregistered, and an exemption for registration does not exist, an investor may be able to rescind the purchase. - Failure to Follow Instructions:
Stockbrokers and sales assistants are generally required to follow their customer’s instructions. Liability may arise where the customer’s instructions are not followed. - Breach of Contract:
There may exist an oral and/or a written contract between the stockbroker and the customer. When the stockbroker breaches its contractual obligations, the broker may be financially responsible for his or her conduct. - Breach of Third Party Contract:
A customer may be a third party beneficiary of the stockbroker’s contract with a regulator, such as FINRA. - Negligence:
A stockbroker owes a general duty of care to his or her customer. In the event that this duty is breached, the stockbroker may be liable. - Failure to Diversify:
A claim for Failure To Diversify is made when a broker fails to recommend an appropriate allocation of an investor's assets into different investment classes. In other words, a claim may exist when a broker recommends too high of a percentage of one's assets be invested in equities, rather than fixed income investments such as bonds. - Concentrated Positions:
Another type of claim may exist when a broker fails to recommend that an investor diversify an existing concentrated position. This situation exists where an investor already has a large percentage of his or her assets invested in a single stock or a small number of stocks. In these situations an investor should be advised that alternative strategies exist. These strategies range from selling the concentrated position, to hedging the position. The broker should make sure that the investor genuinely understands the risks inherent to maintaining a concentrated position.