Prohibited Activities by Brokers

• Brokers receive extensive education before they are licensed on activities that are not allowed when dealing with the public. The four most common investor problems include, but are not limited to, misrepresentation, high-pressure cold-calling tactics, unsuitability, and unauthorized trading.
  
  Of these four, there is no potential liability for losses that result following cold-calling practices. However, that is not necessarily the case when losses are incurred following the other three prohibited activities. Most claims allege intentional or negligent breach of fiduciary duty, lack of a suitable investment strategy, churning, intentional or negligent unauthorized trading, and a failure to supervise. Many of these are detectable -- by both the client and by the firm's management and/or trading supervisor. Any of these may result in losses, but not all may result in an award or restoration. It may help to break down these prohibited practices a bit more.
  
  

Misrepresentation and Breach of Fiduciary Duty

• When an important fact about a security is omitted or obscured when being recommended by a broker, it is a misrepresentation and is fraudulent. In a case like this, it may have been information which would have discouraged the investor from agreeing to a purchase. This is more common in stocks of highly speculative companies. If a loss is sustained due to this, a claim could be sustained.
  
  Investment representatives also have a fiduciary duty to their clients. They are held to a higher standard of knowledge and understanding than investors -- due to their professional designations and training -- and are charged with looking out for the clients' best, highest interests first, above all others. If a loss is incurred due to a fiduciary breach, the broker may be liable.
  
  

Lack of Suitability

• This is one of the most important areas of liability. While most other areas of potential claim are due to their being "improper" or wrong, suitability is likely to carry the most weight. The first thing a regulator will investigate when a claim is made is the objective the client selected for the account when completing the new account forms and brokerage agreement. Generally, the account objective will be anything from "capital preservation" to "speculation."
  
  If a loss is incurred for no other reason than that the price of the security went down, and the account has elected "growth of principal/stocks" as an objective, it may not be deemed to have been an unsuitable recommendation. If a stock didn't belong in the account because the client elected a "safety" objective, that's a different matter and there clearly may be liability.
  
  

Churning and Unauthorized Trades

• Churning is the excessive buying and selling of securities, and is viewed to be for the benefit of the broker's commissions. While churning adds expense to the operation of the account, it may not be out of character for a client's profile and it doesn't always result in losses. However, if a broker is soliciting the business, and the client has a pattern of approving high activity, the claim may be difficult.
  
  Trading a client's account without authorization is a fairly grave offense, and if there is a loss, a valid claim can be made. Many clients do give the broker discretionary trading authorization, however, in writing. In that event, the trades are not unauthorized. Finally, if you are disputing losses at an online or discount broker, read your account agreements carefully. You will find that the brokerage firm will have very likely inserted information -- which you have agreed to -- that holds it harmless for your investment actions unless the question of suitability is the issue.