FINRA

Breach of Fiduciary Duty

A fiduciary duty is the highest duty the law can impose. A fiduciary duty obligates the fiduciary to act solely in the interest of the other. Examples of fiduciaries are an executor of an estate, a trustee of a trust, an agent who represents a principal, an attorney representing a client, and a financial adviser who provides investment advice to a client.

When a broker acts as a financial adviser by providing investment advice and not as a mere order taker, the broker is a fiduciary. Generally, a fiduciary relationship is a special relationship, and not a small “arms-length” business relationship (such as when a broker acts as a mere order taker).

The relationship in which (in this case) an investor reposes trust and confidence in an investment adviser with the expectation that the investment adviser will act in the investor’s best interest.

Facts About Fiduciary Duty

It is a matter of the fact that many brokerage firms refer to their brokers as financial advisers or financial consultants and not as mere brokers.

The law in Georgia and a majority of states says the standard relationship between a stockbroker and an investor client is fiduciary in nature.

It follows that when a broker/adviser fails to act in his client’s best interest, a breach of fiduciary duty has occurred. Misconduct like misrepresenting and failing to disclose material facts and recommending unsuitable investments constitutes a breach of fiduciary duty when such an obligation exists.

A breach of fiduciary duty would also extend to a circumstance where a broker/adviser failed to disclose a conflict of interest or had interests and goals that conflicted with his investor client. An example of such a conflict would be a broker selling his client a mutual fund that is not the most suitable of the available choices because the cost to the investor is higher than other similar funds.

What Does Your Fiduciary Owe You?

Many investors seek advice from a broker/adviser because they have complex financial decisions to make and lack the background and experience to feel comfortable in making them. Most investors intuitively repose trust and confidence in their broker/adviser. After all, brokers have been held out as trusted advisers (and even family friends) by prominent firm TV advertising.

Most broker/advisers spend more than a little time trying to cultivate a relationship of trust and confidence with clients and potential clients. If an investor client files an arbitration claim, all of that changes and the broker often argues that the investor made the investment decisions and he (the broker) has no responsibility for them.

What Should I Do if I Suspect a Breach of Fiduciary Duty?

If you suspect that you are the victim of a breach of fiduciary duty, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including breach of fiduciary duty. Call us for a free consultation.

Broker Misrepresentation

The law prohibits a broker from misrepresenting material facts about a proposed investment to a potential investor. A material fact is one that a reasonable investor would consider noteworthy. Brokers have an affirmative duty to disclose all such material facts.

If a broker makes an untrue statement or a misleading statement about a proposed investment, such a misrepresentation provides legal grounds for an investor to recover all or part of the loss.

“Recovery holds even if the misrepresentation was not fraudulent but only negligent”

The types of misrepresentation we see include misrepresenting and failing to disclose the essential features and risks of various alternative investments, such as non-traded REITs, structured products, and variable annuities. These products are sometimes represented to be liquid and safe when, in fact, they are illiquid and involve more risk than is suitable for the investor. For example, in the case of non-traded REITs, they are challenging to sell, must be sold, if at all, on a secondary market for a fraction of the purchase price.

Also, non-traded REITs, structured products, and variable annuities are non-transparent, complex investments that are not well understood by the selling brokers. Structured products, for example, are linked to another asset, often a derivative such as an option. The performance of a structured product is dependent on the performance of its linked asset. Complex contractual terms that are drafted by the issuer for the benefit of the issuer more than the investor. If the selling brokers do not fully understand all of the features and risks of a product, they cannot adequately explain them to investor clients.

What Should I Do if I Suspect Misrepresentation?

If you suspect that you are the victim of misrepresentation, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including breach of misrepresentation. Call us for a free consultation.

Excessive Trading (Churning)

Churning is excessive trading that violates the suitability standard and is motivated by a broker’s desire to generate sales commissions. Churning constitutes fraud under the federal securities laws and violates the conduct rules of securities regulators. Courts have considered various metrics in evaluating churning, including the frequency of trading, the turnover ratio, the cost-equity ratio, and the commission-to-equity ratio.

“Turnover ratio” is the ratio between the total cost of purchases for an account divided by the account’s average net asset value during a specified period.  No one universally recognizes an annual turnover rate that has constituting churning.

The Complications of Account Churning

The SEC presumes that a turnover ratio over 6 reflects excessive trading. However, the SEC has also found that much lower turnover levels can indicate excessive trading. A customer’s investment objectives are also critical factors in determining whether a particular turnover ratio supports a claim for churning or excessive trading.

A broker obtains the commission-to-equity ratio by dividing the total commission charges by the average equity in the customer’s account.

The cost-equity ratio reflects the rate of return an account would have to earn on an annual basis to “break-even” after accounting for all costs and charges. The SEC has taken the position that a break-even cost ratio above 20% is indicative of excessive trading.

What Should I Do if I Suspect Excessive Trading?

If you suspect that your account is excessively traded, you should consult with experienced counsel. The Doss Firm attorneys have substantial experience in representing investors in a wide variety of matters, including excessive trading or churning. Call us for a free consultation.

Sales Practice Violations

According to FINRA, the term “sales practice violations” includes any conduct directed at or involving a customer that would constitute a violation of:

• A FINRA rule for which a person could be disciplined
• Any provision of the Securities and Exchange Act of 1934
• Any state statute prohibiting fraudulent conduct in connection with the offer, sale or purchase of a security
• In connection with the rendering of investment advice

Sales practice violations include common claims brought by investors in FINRA arbitrations, such as:

• Unsuitable investment recommendations
• Misrepresentation or failure to disclose material facts about an investment
• Excessive trading a/k/a churning
• Breach of fiduciary duty
• Negligence
• Unauthorized trading
• Overconcentration
• Incompatible or unauthorized use of margin
• Failure to supervise.

FINRA’s supervisory requirements are designed to prevent and detect sales practice violations. FINRA has made it clear that failure to supervise is itself a sales practice violation, failure to supervise encompasses:

• A Failure to establish a reasonable supervisory system and written supervisory procedures;
• Failure to reasonably supervise a firm’s registered representatives;
• A Failure to enforce written supervisory procedures; and
• Failure to take appropriate remediating action.

FINRA Brokercheck

What Is FINRA Broker Check?

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that regulates stockbrokers and brokerage firm sales practices, among other things. FINRA’s BrokerCheck is a free database that investors can use to research a broker, investment adviser, and brokerage/advisory firm, including their background and customer complaints.

• A BrokerCheck Report for a brokerage firm contains:
• An overview of the firm
• Firm’s background
• Disclosure section containing arbitration awards and disciplinary events

FINRA obtains the information in BrokerCheck from the Central Registration Depository (CRD). All brokers must be licensed and registered by FINRA. Data in the CRD originates from forms that brokers, brokerage firms, and regulators complete as part of the securities industry registration and licensing process. Information about investment adviser firms and representatives comes from the Securities and Exchange Commission’s Investment Adviser Registration Depository (IARD) database.

When Did Brokercheck Start?

Brokercheck launched in 1988. On March 19, 2007, the NASD launched an updated, redesigned version of Brokercheck.

FINRA Broker Check Reports

BrokerCheck reports generally contain information about the broker’s licenses and exam history, the broker’s registration and employment history, and information about customer disputes, disciplinary events, and certain criminal and financial matters on the broker’s record.

Help Checking a Broker

If you have questions about your broker or adviser, we can help. Call The Doss Firm for a free consultation. FINRA exists to protect investors from bad practice by financial institutions. The Doss Firm, LLC can back you up in the case of something going wrong.