Securities Arbitrations
9/04
When you open a stock brokerage account, in just about every case you will sign an Arbitration Agreement with the brokerage firm by which you agree to arbitrate any future dispute in a securities industry arbitration forum. This agreement is typically found in the fine print of your Customer Agreement. This means that, if you suffer losses due to the mishandling of your account, you cannot sue your stockbroker or brokerage firm in Court, you would have to take your dispute to an Arbitration Forum such as the New York Stock Exchange, the National Association of Securities Dealers or the American Arbitration Association.
For larger cases, the arbitration panels in these forums are comprised of two public arbitrators and one securities industry arbitrator. The industry party (i.e. stockbroker or brokerage firm) win these cases slightly more than 50% of the time. One reason for the slightly higher better record is the number of frivolous claims that get filed by customers.
You cannot win a case just because the stock you bought lost a substantial portion of its value. No one can predict the future, including your stockbroker. You can win a case when there has been mismanagement of your account.
When you open up an account with an investment firm, you sign a substantial amount of documentation showing your assets, income, risk tolerance and investment objectives. A forty year old man earning $75,000.00 a year is going to have much different investment objectives and risk tolerance than a seventy year old man with just social security income. From the outset, your account will have a profile which shows your investment experience and the types of investments and trading in which you wish to engage. It is important that you review this written profile before you start making trades to ensure that your stockbroker understands your goals.
With high risk investments, there is a potential for great reward. If you wish to speculate and trade futures or options on margin, you will have a hard time complaining if your account suffers great losses. However, if you have a very low risk tolerance and wish to only make conservative investments and your stockbroker makes risky trades without your authorization that result in substantial losses, you will then have a legitimate complaint.
Every stockbroker must abide by the “know your customer rule.” This means he or she must know your account profile and must trade within those limits. Unless you have given your stockbroker discretionary trading authority, all trades must be authorized by you. The two most common claims against stockbrokers are for “unsuitable trades” (i.e., trades that are beyond the scope of your trading profile) or “unauthorized trades” trades to which you did not consent. When unsuitable or unauthorized trades are present, it is often the result of an illegal practice known as “churning” where trades are made by a broker with no rational investment purpose and solely to generate more trading commissions.
Investors can get a fair opportunity to present claims against brokers in the securities industry arbitration forums; however, such claims should not be brought unless there has been a clear mishandling of your account (not just a loss based upon market conditions). Disputes are easily avoided if you make sure your New Account information is truthful and accurate when you open your account and if you closely monitor the trades taking place in your account.