It’s disheartening enough to watch your account value go down. It’s even more disconcerting when you believe it’s not due to market action, but because a broker has failed to follow your wishes, taken too many risks, or has acted in their own interest at the expense of yours. Although not all losses can be recovered, investors have legal rights and potential remedies when broker misconduct or negligence is a factor.
Market Losses vs. Broker Misconduct
Brokers do not guarantee profits. Even a cautious or diversified portfolio can go down. Legal claims arise when the problem isn’t the market, but the broker’s conduct. This includes the following.
Unsuitable Recommendations
The brokerage firm makes recommendations that do not fit with your risk tolerance, investment goals, or financial situation. Recommending fraudulent investments also fits this category.
Unauthorized Trading
Trades made without the investor’s consent. This will depend on the nature of the account and the amount of discretion a broker has to trade on behalf of an investor.
Churning
This is when a broker engages in excessive trading to earn commissions.
Misrepresentation
When a broker misleads the investor, for example, by promising unusually high or guaranteed returns, a responsible broker is forthright about the uncertainties associated with any investment.
Failure to Supervise
A brokerage firm has a certain responsibility regarding the actions of its employees. When a broker fails to supervise a representative, they may be liable for actions taken by the representative.
Core Legal and Regulatory Protections
Investor rights derive from several sources, including brokerage contracts, state and federal laws, and industry self-regulatory organizations. Key terms to understand include:
Best Interest
This concept holds that recommendations must be made in your best interest. This is a broad concept that can apply to any aspect of the investor-broker relationship.
Suitability
Suitability overlaps with best interest, but speaks to the unique needs of a particular investor.
With financial products, a broker must have a reasonable basis to believe a recommendation was suitable for you. This means that they have to take into account your investor profile, age, goals, experience, and other factors.
Fiduciary Duties
For a typical account, the investor operates independently, but may choose to get advice from a broker. In some accounts, the broker takes a more active role, such as that of an investment adviser. In some cases, the broker takes on fiduciary duties and has a higher obligation of loyalty and care than with a typical account.
Contractual Rights
The terms of your account contract will outline the rights you have, including whether your broker has discretionary power, what your broker must inform you of, and any arbitration provisions.
What Compensation is Available to Investors?
If misconduct is established, there are several potential remedies.
- Recovery of losses related to the unsuitable or unauthorized conduct.
- Rescission or unwind type remedies. This refers to a contract or agreement being canceled.
- Refunding of interest or fees.
- Punitive damages.
- Attorneys’ fees.
The practical reality is that recoverable damages are case-specific and heavily driven by local and federal laws, account records, and timelines.
FINRA Arbitration: Where Claims are Usually Resolved
In most cases, the brokerage account contract stipulates that any disputes are to be settled through FINRA (Financial Industry Regulatory Authority) arbitration rather than in court. Arbitration is a private dispute resolution process in which a panel hears both sides of the case and issues a binding decision. For many investors, this may be a faster process than going to court.
As this is an evidentiary-based process, documented evidence is important. This may include statements, confirmations, emails, texts, recordings of phone calls, notes of conversations, and the forms you signed when you first opened your account.
Signs That a Loss May Involve Wrongdoing
Not every red flag proves broker misconduct, but these patterns can be warning signs.
- You see trades you don’t recognize or never approved.
- Your account suddenly shows margins or options activity you don’t understand.
- The broker’s strategy doesn’t match what you discussed.
- The account has high turnover, frequent transactions, or rising fees.
- The broker doesn’t answer your questions or avoids written communication.
Practical Steps to Protect Yourself
Here are some guidelines to help you stay alert when dealing with brokers and be ready to take action if a broker behaves unethically.
- Organize your records. Save all statements, trade confirmations, new account forms, and all communications with the firm.
- Document your experience, including what you were told, what you agreed to, and what your goals were.
- Ask important replies in writing.
- Be cautious of settlement or release agreements. Firms may offer money in return for giving up rights. Before signing anything, consult a lawyer.
- Learn about time limits. Your claims may have statutes of limitations, arbitration rules, or contractual provisions.
We cannot forecast the future of markets. Still, we can hold professionals responsible for their conduct when losses result from unsuitable advice, unauthorized trading, and other forms of broker misconduct. Knowing your rights, documenting your transactions, and understanding how disputes are typically resolved will help you make a more informed decision about whether you have a viable case for recovery.
