Request Legal Help Now - Free


Stockbroker Arbitration: Investors Concerned About Suitability Violations

. By
New York, NYAlthough there are many reasons why investors could be concerned about their stockbroker's conduct, one of the more common reasons for requesting [stockbroker arbitration] is suitability violations. Suitability violations occur when a stockbroker recommends investments that are not suitable for the client based on his or her financial situation, goals, age and experience in the market. Such violations are becoming an increasingly common complaint against stockbrokers.

The suitability of investments change based on every investor's personal situation. A high-risk investment is generally not suitable for a senior who lives on a fixed-income; however, that same investment could be fine for a younger person who has a large income. It is up to the stockbroker to make sure that each investment is suitable based on each individual client's situation. Suitability violations can also occur when a stockbroker fails to diversify a client's portfolio or has too many investments in speculative securities.

Stock brokersIn order to make suitable recommendations to clients, stockbrokers must take the time to get to know their client, including finding out about that client's financial situation, financial goals and investment experience. This is mandated by both the NASD and the New York Stock Exchange. NASD conduct Rule 2310 states: "In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situations and needs." Similarly, the "Know Your Customer Rule" from the NYSE (Rule 405) requires members to use "due diligence to learn the essential facts relative to every customer."

Stockbrokers are also duty-bound to investigate the financial condition of securities and their issuers.

Unfortunately, many investors do not realize they have been advised to make an unsuitable investment until they start losing money. Rarely do investors make suitability claims when stock prices are increasing and portfolios are making money.

Investors who think their stockbroker has made unsuitable investment advice can file for stockbroker arbitration with the Financial Industry Regulation Authority (FINRA), which was formed when the NASD and New York Stock Exchange joined forces. Many brokerage firms require clients to sign forms that include arbitration provisions before they agree to do business with that client. Thus, when a dispute arises, most investors find themselves in stockbroker arbitration to settle their disputes.

Arbitration is generally more cost effective than a court case and an arbitration hearing usually occurs more quickly than a trial. The majority of arbitrations, from initiation of complaint to the resolution, are finished in 12 to 18 months. Arbitration hearings are also less formal than court trials. One point that many people find favorable with arbitration hearings is that the decision of the panel is final and can only be appealed under very limited circumstances. This means that no matter how deep the pockets of the brokerage firm, the company cannot repeatedly appeal a finding for the complainant, often a problem in court cases involving large, wealthy firms. However, this also means that the complainant must be completely prepared for the arbitration hearing because he or she will also not be able to appeal an unfavorable outcome.


Stockbrokers and Financial Advisers Legal Help

If you have suffered stock losses as a result of stock broker negligence, please contact a lawyer involved in a possible [Stockbrokers and Financial Advisers Lawsuit] who will review your case at no cost or obligation.


Please read our comment guidelines before posting.

Note: Your name will be published with your comment.

Your email will only be used if a response is needed.

Are you the defendant or a subject matter expert on this topic with an opposing viewpoint? We'd love to hear your comments here as well, or if you'd like to contact us for an interview please submit your details here.

Click to learn more about

Request Legal Help Now! - Free