A broker owes a duty of care to their customers that demands that the broker put the interests of the customer first. This means that the broker can trade stocks only when a customer orders it, and must follow that order precisely and try to get the best available price. The broker must disclose any important facts relating to potential investments and not make any misrepresentations. A brokerage firm has the duty to supervise their brokers and make sure they comply with securities laws and take proper actions if there are any violations.
What Would be Considered Violations of Securities Laws?
Federal securities laws, state "blue-sky" laws, and consumer protection statutes all act to protect customers from these various violations by brokers and brokerage firms:
- Fraud and misrepresentation – this occurs when a broker either knowingly did not disclose an essential piece of information to a customer, or knowingly lied in relaying important information to a customer. In either case, if the information (or lack thereof) worked to the detriment of the customer, the customer may be able to take legal recourse.
- Negligence and malpractice – a broker has a duty to adequately manage a customer’s account in the best interest of the customer. When the broker fails to look out for the best interests of the customer, even if it was not an intentional act, the broker could be liable for negligence and malpractice. An example of this would be the broker failing to properly diversify the customer’s portfolio when the broker had the authority and duty to do so.
- Breach of contract – this usually pertains to the New Customer or New Account Agreements the customer signs when an account in opened. When the broker does not follow the instructions of the customer, does not adequately manage the account, or does not operate in good faith, he may be in breach of contract.
- Unsuitable trading – it is considered to be the duty of the broker to "know the customer"based on the customer’s financial situation, knowledge of investing, investing goals, and risk tolerance. When a broker makes any investing recommendations to the customer, he must keep these factors in mind. If the broker makes any recommendations that clearly would not be ideal for the customer, or even if the broker allows the investor to make his own decision that would not be in his own interest without informing the investor of the potential detriment, the broker could be liable to the customer.
- Churning – the broker cannot promote excessive trading in order to further his own interests in payment of commissions. The broker must keep in mind the character of the customer’s account, and recommend trades to the customer only as often and only when it would be beneficial to the interest of the customer.
- Breach of fiduciary duty – because of the level of trust involved in a relationship between a broker and a customer, a broker is bound by a higher duty of care to operate in good faith and not take any actions or make any recommendations that would violate this trust.
- Failure to supervise – a brokerage firm must not only put into place protocol that operates to supervise brokers in making sure they do not violate any securities laws, but also be able to show that these procedures were reasonably effective in deferring any violations
What Should I Do if My Broker Has Violated His Duty to Me?
Make sure to file a complaint with the brokerage firm the broker is working for. You may also want to file a complaint with the Securities and Exchange Commission for any violation of securities laws. You may be entitled to money damages for any violations by your broker that resulted to your financial detriment, so you may want to contract a criminal attorney who has experience in dealing with securities law and securities fraud.