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Broker-dealer fraud, misrepresentation and other types of misconduct have been prevalent for a number of years in the security investment arena. As a result of this, brokerage firms come and go as do account executives. Consequently, when you are considering doing business with a particular brokerage firm or account executive, there are a number of factors to consider in order to reduce the risk to which you might be exposed.
First, as it relates to a brokerage firm, you should consider, among other things, the following:Check The Regulatory History of the Broker-Dealer
Regardless of how much you like the sales pitch that you receive from the account executive soliciting your business, how luxurious the brokerage office is, what the firm’s prior reputation is or how close the office is to your home or office, always go to the Financial Industry Regulatory Authority website and perform a broker check. This link will lead you to the broker-dealer CRD. This document will allow you to view how long the firm has been in business, the type of products which the firm is authorized to purchase and sell, complaints filed against the firm, disciplinary matters in which the firm was involved and other general information about the firm. If there are a number of previous or pending arbitration claims against a firm or a history of regulatory actions, you might want to think twice about doing business with this firm.Net Capital of the Firm
Brokerage firms are required to follow certain rules that are designed to minimize the chances of financial failure and, more importantly, to protect customer assets if they do fail. For example, the SEC’s Rule 15c3-1-the “Net Capital Rule”-requires brokerage firms to maintain certain levels of their own liquid assets. The minimum net capital a firm must have on hand depends on its size and business. The statutory minimum amounts of net capital range from as low as $5,000 to over $1,000,000.
Consequently, the first thing that you should consider when establishing a relationship with a firm is what is their net capital requirement, for if the firm falls below its net capital requirement, it will be forced to shut down its business. This type of situation has been a hot topic recently because of the number of firms that have been forced to close as a result of large arbitration awards entered against them for selling illiquid limited partnerships. If you have lost money with a brokerage firm that has a low net capital requirement, the faster you take action to recover your investment losses, the greater your probability of collecting.What Type of Products Does the Firm Deal in?
Is the firm that you are contemplating dealing with a “full” service firm or a boutique style firm? Does it deal with products that fall within your investment parameters, including risk tolerance? In other woes, does the firm deal in high risk or little known products, which history has demonstrated do not always fare that well.
Each FINRA member firm has executed a membership agreement, with FINRA, which agreement details the type of products that the firm is able to deal with. This information is summarized in the broker-dealer CRD information referenced above.
Second, you need to consider, among other things, the following about the account executive:Check Out the Account Executive
Again, as with the firm, the first thing that you want to do before commencing a business relationship with the account executive is to go to the FINRA broker check website and get relevant information concerning the account executive that is provided to FINRA under penalty of perjury. There is no puffery on these forms. What you see is what you get.The FINRA CRD Report
After you get a copy of the CRD Report on your potential account executive, see how long he has been in the business, how long he has been with his current firm and what licenses he has. This will provide you with a sense of his stability and potential investment knowledge.Try To Determine The Extent Of The Account Executives Level Of Investment Knowledge
This is probably the most difficult task that you will have to perform. The reason for this is that most investors do not have the time, resources or knowledge to make a determination as to what security to buy, when to buy it, how long to hold it and when to sell it. This is the most subjective determination that you will have to make not only at the commencement of the relationship, with your account executive, but continuously as the relationship moves forward.
It is stunning, in almost every securities arbitration or litigation case that I have done over the years, how much the account executives don’t know. This not only relates to particular investment but also investment strategies. Therefore, if you are being told something that does not make sense, get a second opinion. This second opinion can come from a number of sources such as your CPA, another qualified investment professional or qualified legal counsel. Don’t be lulled into a false sense of security. As a long time attorney practicing in this area of the law, I would just as soon you take reasonable steps to protect yourself and your investments because, normally by the time we get a call, the loss has already occurred. In other words, the best line of defense is your diligence.
We have, with this website, attempted to provide reliable information to allow the reader to, among other things: (1) expand his or hers knowledge of broker-dealer and account executives responsibilities to investors, (2) highlight critical items that need to be considered when opening an account with a firm, (3) explain the difference between a non-discretionary, discretionary and hybrid account relationship with the firm and account executive, (4) provide information relative to investment terms and concepts so that investors can attempt to more fully protect themselves when establishing a relationship with a broker-dealer or investment advisor and in the monitoring of the investments in their account and (5) provide other information that we believe may be of interest to investors.
If you feel that you have lost money as a result of broker-dealer and/or account executive fraud, misconduct or misrepresentation, time is not on your side. You should immediately contact a qualified professional to have your matter reviewed so that you can make intelligent decisions regarding what to do. TIME IS OF THE ESSENCE!