Most brokerage firms and their sales agents/brokers deal honestly and fairly with their customers. However, sometimes difficulties and disputes arise and on rare occasions, fraud and theft may occur. There are several steps you can take to protect yourself from becoming a victim of fraud or abuse. There also specific steps you should take to resolve problems when they do occur.
One of the best ways to deal with problems is to avoid them in the first place by taking an active role in the management of your account. Because you must approve almost all transactions prior to any orders being entered, you should question your broker about any trades or other activity entries that you have not authorized. Brokerage firms send trade confirmations listing the quantity, description, and price of every buy and sell transaction. Likewise, monthly account statements are a recap of all activity - trades and other accounting entries - that have taken place in your account. When you receive any mail from your brokerage firm, you should immediately review it. A delay in notifying the brokerage firm of trade problems may result in a change in market value that will discourage a voluntary correction or adjustment by the firm. If there is an error, insist that it be corrected immediately and obtain a copy of a corrected trade confirmation or other written acknowledgement of the correction. Take written notes of your telephone conversation in case you need them later.
You should save all of your transaction records and copies of correspondence in case you need them to support your version of facts in a dispute. Never send the originals of your documents to your broker or brokerage firm. Retain the originals and send copies as requested.
If the broker is unable or unwilling to resolve your concerns, send a written complaint to the manager of the branch where your account is located or to the compliance department of the brokerage firm. The letter should include details of your concerns and copies of any documents that help illustrate the problem or error. Do not merely claim that your account is losing money due to your broker’s recommendations. This broad assertion will not give the firm enough information to identify the problem you are seeking to resolve. Be as specific as possible by providing a chronology of conversations or other events, identifying specific transactions that are in question, and describing your concerns with the broker's statements or actions related to the transaction.
You may also want to send a copy of that letter along with a complaint to the Iowa Securities Bureau or the Financial Industry Regulatory Authority (FINRA). While state and federal regulators cannot represent you in an attempt to recover funds, they can review the activity and practices of brokers and brokerage firms to determine if violations of state or federal securities laws have occurred. These agencies can take various actions that affect the license of registration of the individual or the firm to conduct business in the securities field. State securities regulators can also work with other law enforcement agencies in bringing criminal charges. However, neither state nor federal securities regulators can represent or advise you in seeking a monetary settlement.
Do not be misled by account insurance provided by brokerage firms. Nearly all brokerage firms are required to contribute to an insurance fund administered by the Security Investor Protection Corporation (SIPC) which covers customer account assets should the brokerage firm go out of business or assets be lost through theft or other means. SIPC insurance does not protect an investor from loss of market value or bad advice. No one can predict exactly how a security will perform at a given time in the future. Losing money is not, in itself, a violation of securities laws.
A customer must seek the actual recovery of lost funds through one of four ways. First, of course, is filing a complaint with the brokerage firm and attempting to reach a voluntary settlement. If this fails, state securities laws provide for civil remedies for certain types of violations such as unlicensed broker activity, misrepresentation, or fraud. State laws allow you to take your claim to court, if it is made within a prescribed period of time defined in the law. You should consult with an attorney about your ability to bring an action in state or federal court for securities law violations.
However, many brokerage firms now require customers to sign what is know as a Predispute Arbitration Agreement, which may be part of a more all-encompassing customer or margin agreement. These arbitration agreements bind the parties to resolve all disputes relating to the customer's account via the arbitration process. Some agreements even specify in which forum the arbitration claim must be filed. Arbitration is the third method a customer can use to seek the recovery of investment funds. Arbitration differs from court action in that the parties present their case to a panel made up of industry and public members who will hear the testimony and then jointly make a decision. You are not required to have an attorney to pursue arbitration, but most brokerage firms do utilize the services of in-house or private counsel in defending arbitration claims. Arbitration procedures are designed to streamline the process and be less costly to the parties. However, no formal decision is given by the arbiters; only an award for or against the person who made the claim is decided. The parties also agree that the arbitration decision is final and not subject to appeal (except on limited procedural grounds) or being heard in another forum.
The fourth method a customer can use to try to recover funds is mediation. Mediation is offered through FINRA. Mediation is often suggested after an arbitration claim has been filed. Mediation brings the parties together with a professional mediator. The mediator will not render any decision based on a presentation of facts and evidence. However, the mediator will act as a go-between to help the parties reach a mutually acceptable settlement. Again, this process is designed to be even less costly than either arbitration or court action, does not necessarily require an attorney, and involves the shortest time from claim to resolution. If mediation fails to resolve the dispute, arbitration can still proceed as usual.
Your best defense against problems is to be in contact with your broker and to make sure that your investment objectives and risk tolerance are clear. Ask for a copy of the new account form prepared by your broker. Your financial and investment objective information should be recorded on this form and is the basis for your broker's securities recommendations. Monitor the activity and performance of your account and question anything that does not seem right to you. If you do not receive a satisfactory answer from your broker, contact the compliance department of the brokerage firm or securities regulators. No one cares as much about your money as you do -- be ready to assume the responsibility of watching over it.
Remember, your first attempt to resolve any problems or concerns with your account should be with the broker and the brokerage firm. However, DO NOT wait for a matter to correct itself. If a resolution is not forthcoming, do not hesitate to contact a regulatory authority or to seek legal advice.
Additional investor education information is available through the
Iowa Securities Bureau
601 Locust St. - 4th Floor
Des Moines, IA 50309-3738
You may also obtain this type of information at the North American Securities Administrators Association (NASAA) or 202-737-0900.
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