1. Unsuitable Recommendations. Because stockbrokers serve in a fiduciary capacity, they are obligated to recommend to their customers only those transactions which are "suitable" for the given customer's financial situation and needs. Simply put, the stockbroker must act in the best interests of the customer and not induce them to make trades in a manner that is inconsistent with their investment goals and the risk they want or can afford to take. Be alert for recommendations to make a dramatic change in your investment strategy, such as moving from low risk investments to speculative securities, or concentrating investments exclusively in a single product.
2. Trading to Earn Commissions. The broker must recommend a security on its own merit, not principally on the ground that his employer is the sponsor (makes a market) of the security and he (the broker) will get a higher percentage of the commission by selling you a house-sponsored security.
3. Churning. Churning, a common offense, is when a stockbroker induces his client to enter into excessive or frequent trading so that the stockbroker will receive greater commissions. An excessive number of transactions in your account generates more commissions for your broker, but may provide no better investment opportunities for you. Also, unless there is a legitimate investment purpose for switching your investment in a mutual fund to a different fund with the same or similar investment objectives, a switch recommended by your sales representative may simply be an attempt to generate additional commissions for the broker.
4. Misleading Statements of Material Facts (FRAUD). It is unlawful for a broker to make any untrue statement of a material fact or fail to disclose a material fact which would mislead the client. You should be alert for recommendations from your sales representative that are based on so called "inside" or "confidential information," an "upcoming favorable research report," a "prospective merger or acquisition", or "I have a friend at the company", as well as the announcement of a "dynamic new product". Also beware of representations that your investment will "double" within a short period of time or of any "guarantees" that you will not lose money.
5. Manipulation. This is when the broker uses your money (and the money of others) in transactions intended to influence the price of a security on the public market so that it is not a reflection of the true purchases and sales.
6. Unauthorized and Improperly Executed Transactions. An unauthorized transaction occurs when the stockbroker executes a transaction without obtaining the customer's prior consent. An improperly executed transaction arises when the broker fails to follow the customer's directions. For example, a broker buys when instructed to sell or a trade that was made in the wrong security or at the wrong quantity or price. Sometimes the broker might say that he tried calling you, but this was such a good opportunity, you had to have it in your account. Be suspicious of any excuses from your broker that such problems are simply due to a computer or clerical error.
7. Failure to Supervise. A brokerage house has the obligation to supervise its brokers to make sure they are not violating the rules of professional conduct and make sure that none of the conduct described here has occurred. Failure to closely supervise makes the brokerage house liable to the same extent as the broker.
8. Conversion. Occasionally brokers outright misappropriate funds or securities entrusted to them by their customers (stealing). This is also illegal.
9. Excessive Mark-Ups. When the broker acts as a principal and/or market maker and sells a security to you, he cannot charge you a mark-up which is excessive given a fair market. When he purchases a security from you, he cannot purchase at a discount which is excessive given a fair market
Law Offices of Steve A. Buchwalter
16133 Ventura Boulevard
Encino, CA 91436.