Most people hire stockbrokers and financial advisors and stockbrokers to grow and protect their investment accounts. After all, these financial professionals are supposed to possess specialized knowledge of financial products and provide their clients with helpful and accurate advice. When you hire stockbrokers, you expect them to help you with your investments, not destroy the nest egg you have accumulated over years of hard work and saving.
Unfortunately, stockbroker negligence results in billions of dollars in losses for investors every year. If you believe your stockbroker or financial advisor committed negligence in the handling of your investment account, you could recover your losses through FINRA arbitration. Contact Patil Law today. You can call us at 800-950-6553 or email us at cp@patillaw.com.
What Is Stockbroker Negligence?
Stockbroker negligence occurs when a broker or investment advisor’s conduct falls below established industry standards designed to protect investors from unreasonable risk of harm. The Financial Industry Regulatory Authority (FINRA) sets rules for brokers to follow. FINRA’s rules protect investors from fraud, overreaching, undue influence, and manipulative practices by stockbrokers.
Unsuitable Recommendations
FINRA Rule 2111 requires brokers to recommend only investments and investment strategies suitable for the investor. Rule 2111 imposes three obligations on brokers. First, the reasonable-basis obligation requires the broker to have a reasonable basis to believe, based on reasonable diligence, that the investment or investment strategy recommended is suitable for some investors. Reasonable diligence should provide the advisor with an understanding of the risks and rewards associated with the recommendation. Next, the customer-specific obligation requires stockbrokers to have a reasonable basis to believe the recommendation is suitable for a particular customer’s investment profile. Whether an investment is appropriate for a customer’s investment profile depends on many factors, including:
- Age,
- Financial situation and needs,
- Tax status,
- Investment objectives,
- Investment time horizon,
- Liquidity needs,
- Investment experience, and
- Risk tolerance.
The quantitative suitability obligation contained in Rule 2111 will be further explained in the next section.
Excessive Trading
In most cases, stockbrokers earn commission on every transaction they perform on behalf of their customers. This pay structure incentivizes some stockbrokers to make as many trades as possible, even if those trades aren’t beneficial to the client. Conducting multiple transactions with the intention of driving up commissions is known as excessive trading or churning. That brings us to Rule 2111’s quantitative suitability obligation. Quantitative suitability requires the broker to have a reasonable basis for believing that a series of recommended transactions are not excessive and unsuitable for the customer when considered as a whole.
When a broker makes excessive trades, the client bears the burden of paying the outrageous commission fee to the broker.
FINRA issued a Regulatory Notice concerning quantitative suitability in 2018.
Overconcentration
You may have heard the phrase “Don’t keep all of your eggs in one basket.” When an investment account holds primarily one type of security, a downturn in the market can result in significant losses for the customer. Instead, a customer’s investment portfolio should stay adequately diversified to lessen the risk of suffering losses during times of market volatility.
Unauthorized Trading
Unauthorized trading occurs when a financial advisor or stockbroker conducts transactions in a customer’s investment account without consent or authority. The way brokers violate this rule depends on whether the customer has a discretionary or non-discretionary account.
When an investor opens a non-discretionary account, the broker must obtain the investor’s consent prior to every transaction made in the account. Alternatively, when an investor opens a discretionary trading account, the investor gives their broker the discretion to make trades in the account without obtaining consent for each individual transaction.
Unauthorized trading violates FINRA rules. However, brokerage firms often try to hold the investor responsible for the misconduct. The firms claim that because you didn’t object to the unauthorized trade, you ratified the transaction when you received your monthly statement reflecting the unauthorized trade. If you notice trades in your account that you didn’t authorize, reach out to a stockbroker negligence attorney today. You could sue a financial advisor or broker for negligence to recover your investment losses.
Material Misrepresentations or Omissions
FINRA requires stockbrokers to disclose the material facts about an investment that help the investor make an informed decision about whether to purchase the investment. Misconduct allegations arise when a stockbroker misrepresents information about an investment to their client. Alternatively, some allegations involve a broker omitting material information about a particular investment. Examples of ways brokers may misrepresent or omit information to their clients include:
- Failing to inform a client that an investment poses unnecessary risk;
- Misleading a client about the expected future performance of an investment;
- Offering a positive research report about an investment while knowing the company offering the investment is headed for bankruptcy; and
- Failing to disclose all the fees associated with a particular investment.
If your stockbroker or financial advisor misrepresented or omitted material information and that misrepresentation or omission influenced your decision to purchase an investment, you could recover any losses you suffered as a result.
Recovering Your Losses Following Stockbroker Negligence
Many clients contact us asking if they can sue a financial advisor for negligence that resulted in significant losses. In most cases, the investment contract between you and your financial advisor or stockbroker includes a binding arbitration clause. That means the only avenue available to recover your investment losses is through FINRA arbitration.
FINRA provides a forum for the arbitration and mediation of disputes between investors and their stockbrokers. The arbitration process offers a quicker resolution than the civil court process. FINRA imposes a six-year limit on filing arbitration claims alleging broker misconduct.
FINRA Arbitration Structure
A FINRA arbitration operates similarly to a trial. You and your broker act as the plaintiff and defendant while the arbitrator or panel of arbitrators acts as the finder of fact. Unlike in civil court, the losing party can’t appeal the judgment of the case. FINRA offers a Reference Guide that outlines the policies and procedures of FINRA’s dispute resolution process.
Filing a FINRA Arbitration Claim
You can initiate the arbitration process by filing a “statement of claim” with FINRA. FINRA refers to the party filing the claim as the claimant and the responding party as the respondent. The statement of claim should lay out the parties to the dispute, your allegations, the relevant period, and a demand for relief. The statement of claim gives you the chance to put your best foot forward with your complaint. Having an experienced securities attorney help you prepare your statement of claim can mean the difference between recovering your investment losses and forfeiting them.
FINRA will serve the respondent with your statement of claim. FINRA grants the respondent 45 days to respond to the statement of claim with an answer. A failure to respond could result in a default for the respondent.
Choosing an Arbitrator
Unlike the court system, FINRA arbitration gives the parties a choice in determining which arbitrator or arbitrators will hear your case. FINRA uses a computer algorithm known as the Neutral List Selection System (NLSS) to randomly generate lists of arbitrators from FINRA’s arbitrator roster. You can learn about the duties and obligations of FINRA arbitrators in the FINRA Dispute Resolution Services Arbitrator’s Guide.
In investor cases claiming up to $100,000, the parties receive a list of ten potential arbitrators. Each party can strike up to four arbitrators from the list, then rank the remaining arbitrators by priority, ultimately receiving a single arbitrator to preside over the claim.
In investor cases claiming over $100,000, the parties receive three separate lists of arbitrators. The first list names ten chair-qualified public arbitrators. The second list names fifteen public arbitrators. The final list names ten non-public arbitrators. Each party can strike up to four arbitrators on the first list, six arbitrators on the second list, and all the arbitrators on the final list. The parties rank the remaining arbitrators, ultimately receiving a panel of three arbitrators to preside over the claim.
Pre-Arbitration Phase
Arbitrators hold pre-hearing conferences that typically occur over the phone or online. At the pre-hearing conference, the parties establish a timeline for the case, receive a schedule for discovery requests and responses, and determine whether mediation could solve their issues. If you have evidence demonstrating the investment losses you suffered as a result of your stockbroker’s negligence, your stockbroker’s brokerage firm could offer you a settlement agreement to avoid arbitration.
Arbitration Hearing
The arbitration hearing offers investors the opportunity to tell their side of the story. The arbitrators provide each party a chance to give an opening statement, call witnesses, present evidence, and give closing arguments. You can find more information about FINRA arbitration hearings through FINRA’s website.
Arbitration Awards
The arbitration panel should issue an award within 30 days from the date they close the record. The award will contain a summary of issues presented at the hearing, a ruling on damages and other relief requested, and fees assessed against either party. The losing party must pay the damages within 30 days.
Contact Patil Law Today
If you suffered investment losses as a result of broker negligence, you could recover your losses in FINRA arbitration. In most cases, a broker’s brokerage firm will hire a lawyer to represent the broker against your allegations of negligence. Having an experienced securities attorney to assist you in filing your statement of claim with FINRA and representing you in the hearing can level the playing field. Contact our office today at 800-950-6553 so we can help you recover the compensation you deserve.
