Most investment losses result from market fluctuations, not misconduct. It’s critical, however, to know the difference. If you lost money and confront your broker about it, a sign of smoke is some fast-talking by the broker to convince you he or she has done nothing wrong, that the loss was out of their control or it was your fault.

Here are the most common types of broker and investment advisor misconduct, according to the Investor Rights Network Web site:

Misrepresentations and omissions

Brokers, investment advisors and financial planners must have a reasonable basis for the statements they make about the performance of any investment. Assurances or promises made without a reasonable basis may be actionable.

For example, there are few sure things when it comes to investing, and a broker who tells you a stock is definitely going up or guarantees a 20 percent return is making a misrepresentation. Brokers must provide and explain to the investor all material information known about a potential investment, including the fees involved and the degree of risk one should expect from the investor.

Unsuitable recommendations

That same triumvirate – brokers, investment advisors and financial planners – have a responsibility to “know” their customers and to make recommendations suitable for their needs in light of the customer’s circumstances and investment objectives. It is simply unsuitable for a broker or investment advisor to recommend a risky investment to a customer who is seeking conservative investments or cannot afford significant losses.

It’s often unsuitable for a broker or advisor to recommend a portfolio over concentrated in a small number of stocks or in one asset class, or a portfolio that is highly illiquid. In addition, brokers and advisors must take into consideration tax implications of a recommendation.

Inappropriate use of margin

Brokerage firms and their employees are required to inform customers about risks involved in the use of margin (borrowing using securities as collateral, usually to purchase additional securities) and to have customers sign a margin disclosure document prior to implementing any margin transactions in an account.

Excessive trading

This is commonly called churning, and is essentially what it sounds like: too much trading in a customer’s account over which a broker or financial advisor exercises control. A broker or financial advisor is deemed to have control over an account if the broker or advisor has discretion to trade for the customer, or the relationship between the customer and broker or advisor is such that for all practical purposes the broker or advisor is deciding what to buy and sell.

Unauthorized investments

A broker or advisor can’t make trades on your behalf without your prior authorization. A customer has a claim against the broker, advisor or firm if she or he loses money on an unauthorized transaction. Even if a customer grants the money managers discretion to trade on their behalf, the broker or advisor must follow whatever guidelines have been set, such as the customer’s desire to maintain a conservative portfolio.

Failure to execute a trade

A broker or advisor has an obligation to follow the customer’s instructions with respect to transactions in the account. If a customer calls and wants to buy or sell a particular security, the broker or advisor must carry out those instructions in a reasonable and timely fashion. When the broker or advisor fails to do so, the customer may have a claim for any losses incurred as a result of the failure to execute.

Making the bust

Here are the steps you can take to report misconduct of a broker or investment advisor:

  • Prepare a written time-line of the misconduct events, including a clear Description of the Misconduct, When the Misconduct Occurred, and Who Perpetrated the Misconduct.
  • Investigate the broker’s record by contacting the NASD Regulation Inc. ( and inquiring about any past investor complaints and disciplinary actions. This is particularly helpful in supporting your complaint if it shows a history or pattern of complaints suggesting the broker has perpetrated similar misconduct in the past.
  • Contact the brokerage firm’s compliance officer. Relay your complaint and submit it in writing. Include the information found from your investigation of the brokers past history.
  • Submit a complaint to the NASD (see How to file a customer complaint) and by completing a NASD Customer Complaint Form. This complaint can become a part of the broker’s public record when reported on his Central Registration Depository record, or CRD.

Agree to binding arbitration

The firm and the customer settle most complaints. When a complaint cannot be resolved, the matter is referred to the NASD and handled in a process called arbitration. The process, conducted under the Uniform Code of Arbitration, includes these steps – submitting a statement of claim, a response, discovery, a hearing and a determination.

Almost every investment account agreement in the U.S. requires customers to agree to settle disputes through arbitration. Brokerage firms prefer arbitration because it is a prompt and inexpensive alternative to the courts.

The arbitrators are impartial individuals with industry experience, who serve on a roster of available arbitrators and are paid an honorarium funded by the various securities associations and member firms.

Settlement and hush money

When a brokerage firm agrees to settle a complaint, its executives often do so without an admission of wrongdoing by the firm or by individuals. They may offer a monetary award if you agree to withdraw any complaints that you made to the regulatory authorities.

See also…

Business and Finance – Law Forum