By Martin Mushkin
Many clients think their brokers or investment advisors are responsible for the bad performance of their portfolios. You may have the same complaint. Is there a cause of action? What is the forum and what is the substance of the case? It is not enough that markets are down. Formulating a cause of action requires a knowledge of the securities industry and the broker’s relationship with the customer.
Securities brokerage is a heavily regulated industry. Every securities broker and every brokerage house is licensed at three or more levels: by the federal government, every state in which it does business, and by the National Association of Securities Dealers, Inc. (NASD). It is also regulated by every stock exchange in which it is a member. Securities brokers are not guarantors of success, but if they fail to live up to all the rules which apply to the situation, they may be liable to the customer, they can lose their licenses and their jobs, and at the extreme they can go to jail. Causes of action lie within this regulatory framework and in the common law.
An analysis of any customer complaint starts with the customer-broker relationship.
The Customer Dependent on His Broker: On one extreme is the unsophisticated customer who is solicited to open an account by a broker, to whom the broker recommends securities, where the broker repeatedly deals with the customer over many years, where the broker knows that he is handling the retirement savings of the customer, and that the customer relies on him entirely for his professional advice. That broker and his employer/brokerage house take control of the account and may be fiduciaries in the classic sense. They have high exposure if they make a mistake.
The Sophisticated Trader: On the other extreme is the wealthy sophisticated trader who negotiates a low commission with a broker, picks all the stocks, and calls the shots as to when to buy or sell. That person’s broker is an order taker, and he and his brokerage house employer have little exposure. Even so, they must “know their customer,” a technical industry term requiring the broker to find out enough about the customer to make sure that the customer is who he says he is and that the broker does not suggest inappropriate transactions. Nor may the broker be “manipulating” the market for the security, another type of fraud which might be actionable.
Where Does Your Client Fit? Most customers fit somewhere in between. With its heavy regulation and technical jargon, securities law is a legal specialty, and the prosecution and defense of claims a sub-specialty within it. The vetting of a possible claim and examination of what laws, rules and regulations (state, federal, or regulatory) apply is the province of lawyers practicing in that sub- specialty. The answer to the client’s inquiry (and perhaps to your own) is to seek out an attorney with a securities litigation practice who can advise on whether there is a remedy other than simply wringing one’s hands.