Whether a stockbroker (henceforth "RR" which stands for "registered representative") found you in the phone book or was referred to you by a friend, he or she owes the investor a fiduciary duty to put the investor's interests ahead of the RR's interests as business is conducted. A fiduciary duty is owed by the RR because of the trust and confidence placed in the stockbroker by the client. An RR must act with scrupulous good faith, candor and integrity. He is prohibited from investing the money or property of the client in investments which are speculative or imprudent unless he has made full disclosure of the risks to the client.
The customer's experience with investments may be slight or may be vast.
In many instances, the duty owed by the RR to an inexperienced customer
is greater than that owed to a seasoned investor because the less- experienced
investor relies more upon the RR's guidance or advice.
RR's must undergo significant training to pass tests that allow them the
privilege of selling securities to the public. These training materials
can be used against the stockbroker if the stockbroker did not follow
the rules and procedures or acted unreasonably in soliciting the sale
of securities or placing a trade.
Initially, a RR is instructed by management to "Know thy customer."
The RR is trained to and should learn the needs, risk tolerance and requirements
of his customer. Information about the customer and the customer's needs
will often assist the broker in determining what type of account to open
for the customer. There are at least two types of accounts that may be
set up. One is a discretionary account where the RR is given permission
by the investor to purchase stocks on behalf of the investor at the RR's
own discretion. A non-discretionary account is one where the RR initiates
trades of securities after receiving an order from the investor. However,
the registered representative can influence the trade in the non-discretionary
account by the sales pitch or recommendation that is delivered to the
customer.
Typical claims made against registered representatives and their brokerage
houses are based on negligence, unsuitability (for instance, a speculative
technology stock purchase when the customer requested a conservative stock
or her retirement depended on the security of her principal), churning
(trades made to generate sales commissions), failure to supervise, misrepresentation/
omissions, negligence/breach of fiduciary duty, unauthorized trading,
and even fraud. Under the law, the registered representative is an agent
of the brokerage house and therefore, a brokerage house is liable for
all actions of the registered representative done in the normal course
of business. Further, the brokerage house is also potentially responsible
for most all actions of the registered representative under claims of
lack of supervision and oversight, even if the registered representative
acted outside the course and scope of his or her normal activities. (An
RR may be misled by the brokerage's stock analyst when the analyst negligently
or intentionally misguides the RR about the business prospects of a corporation.
The brokerage is also responsible for the analysts' improper behavior.
As reported in the press, analysts have publicly touted stocks even when
they knew their business prospects were poor. One reason this occurs is
due to the larger investment banking fees an analyst and brokerage house
"earn" when a corporation issues a large placement of stock
through the brokerage house.)
Potential defenses to a claim by a customer are several. First of all,
the RR will typically claim that the customer or investor simply made
an informed decision to buy and the stock price of the company's shares
unfortunately went down. The RR may dispute the customer's claims that
the trade was unauthorized (since most orders are verbally given over
the telephone) or that he failed to explain the risks of the investment.
When the brokerage account is opened, there typically is a requirement
on the Brokerage Application Form that the customer submit any and all
disputes to arbitration. Alternatively, mediation is a method that has
attracted attention because it is sometimes quicker and less stressful.