Tips for Securities Investors

As we have entered the millennium, even the “little guy” now has a portfolio of stocks, bonds and mutual funds. All of us rely on the integrity of the market system as policed by the Securities and Exchange Commission and by the Brokerage Houses themselves in making our investing decisions. We then put our faith in an individual broker who may present us with recommendations based upon research or other so-called “due diligence ” when we invest.

Before recommending an investment, a stockbroker must both “know his customer” and “know his investment.” In other words, before recommending any investment, a stockbroker must have conducted a reasonable investigation into the recommended investment to ensure that its characteristics–its return, risk and term–match his customer’s investment objectives, financial condition and risk tolerance. If a stockbroker recommends an unsuitable investment, h/she exposes both himself and his brokerage to liability.

From our firm’s experience in litigating securities cases, we can offer the following “tips” to protect yourself: (1) If an investment you make was recommended by your stockbroker and either the confirmation slip or monthly statement describes the investment as “unsolicited,” meaning the investment did not originate with the broker, correct it with a letter to the stockbroker with a copy to his branch manager; (2) Ask your broker to see the profile he maintains on you to ensure that it accurately reflects your investment objectives and financial condition; (3) If your investment objectives or financial condition has changed be sure to notify your broker of the change; (4) If any investment you make does not appear on your statement ask your broker and his branch manager for an explanation; and (5) If your broker is recommending what appears to you to be a high volume of trades, if you find yourself having bought and sold the same investment, or if you have frequently bought and sold mutual funds ask your broker and his branch manager for an explanation.

Virtually all brokerage agreements have a clause that requires investors to give up the right to file a law suit in any court. Instead, if you have a dispute or claim against your brokerage firm, all parties agree to go through arbitration such as that sponsored by the National Association of Securities Dealers (NASD). It has been our experience that the arbitration process is very costly to the consumer and places consumer investors at a distinct disadvantage in relation to the brokerage firm. The fees of the arbitrators alone are many thousands of dollars and can be tens of thousands of dollars in complex cases involving many days of hearings. Those costs are in addition to attorney’s fees, expert witnesses, transcripts and the like. If the brokerage firm lets cross out the arbitration clause in the agreement, you may wish to do so. In that way, you will preserve your right to file suit in court should a dispute ever arise.