Responsibilities of Investors and Brokers

Today's financial landscape offers investors various financial products, including stocks, bonds, and mutual funds. Many investors rely on professional help to navigate the intricacies of buying and selling securities. These professionals are critical, whether they are called securities brokers, investment advisers, stockbrokers, or registered broker-dealers.

When working with a broker, understanding the process and obligations of both parties is crucial. How can investors avoid disputes with their broker? Understanding investor protections and the broker-dealer's responsibilities will help avoid many issues.

FINRA, the Financial Industry Regulatory Authority, is a not-for-profit securities industries regulator. It's a self-regulatory organization (SRO) overseen by the Securities and Exchange Commission (www.sec.gov).

Congress authorized FINRA to protect America's investors by ensuring the broker-dealer industry operates fairly and honestly. FINRA rules play a critical role in ensuring the integrity of America's financial system.

This article provides a general overview of the primary responsibilities of investors and brokers under applicable rules. It also explains how to get help if you can't resolve a dispute with your broker.

Broker Responsibilities

Brokers owe customers particular duties of care. Brokers owe the highest duty of loyalty and fidelity. If they fall short, they could be subject to securities litigation claims. Investment activity violating those duties may entitle you to bring a breach of fiduciary duty claim.

FINRA oversees broker-dealers. It helps define broker responsibilities. FINRA does the following:

• Writes and enforces FINRA rules for all registered broker-dealer investment companies and registered brokers in the United States
• Examines firms for compliance with FINRA rules
• Fosters market transparency
• Educates investors

Understanding the broker's obligations will help an investor know when a lapse has occurred.

Good Faith and Fair Dealing

Brokers must conduct their business in a manner reflecting honor and integrity. Brokers may not trade securities in your account without your permission. They can't engage in unauthorized trading, which includes making excessive trades in a customer's account to increase commissions. Brokers may not use your funds or securities without authorization.

Know the Customer

Under the "know your customer rule," brokers must learn about their customer's financial conditions before making any investment recommendations. They must also keep customers' information up to date.

Suitable Recommendations

Investment recommendations must be consistent with the customer's financial condition, investment objectives, and risk level. Suitability is a primary consideration for recommendations.

Duty of Loyalty

Brokers must put the customer's interests first. Brokers must avoid conflicts of interest.

Obligation of Disclosure

Brokers must be truthful in their dealings with customers. They must disclose material facts that are reasonably related to an investment decision, including the risks of such a decision.

Authorization for Trading

Brokers can only execute customer trades and engage in the purchase and sale of securities to the extent that they have received permission from the customer to do so.

Compliance With Applicable Laws

In addition to the obligations the broker must abide by, a brokerage firm must supervise the broker. The firm must have a compliance system to ensure brokers don't violate federal securities laws and regulations. Such laws include the Securities Exchange Act of 1934 and the Securities Act of 1933.

Investor Responsibilities

Investors must enter a broker relationship following preparation. While brokers generally have the knowledge and experience in investing, investors can take steps to protect themselves through education.

Learn About Investing

Investors will have a greater chance of understanding the process, risks, and terminology of investing by doing the following:

• Becoming better informed through classes
• Attending seminars
• Reviewing investing websites
• Reading books on investments

The more you learn about investing, the better you will be prepared to avoid conflicts.

Understand That All Investments Involve Risk

Risk accompanies any investments. There are many different types of risks involved in investing. Understanding the risks associated with investing is essential to making informed investment decisions.

Investigate the Broker and Securities Firm

Interview multiple brokers before making a selection. Make sure you understand how they invest funds. It's critical to understand how the broker and investment company charges for services. Ask if they have ever been the subject of complaints and verify their background through available tools.

Review New Account Documents Carefully

Read everything, including the fine print. Make sure you understand the terms of any agreement you sign. Only sign documents after you understand the contents.

Research Any Potential Investment

Perform your due diligence. Review materials such as the following:

• Prospectus
• Annual reports
• Financial statements (when available)
• Any other offering information

Review the information carefully. Before moving forward, understand how the investment works and the risks involved.

Provide the Broker With Complete and Accurate Information

Giving the broker complete and accurate information is critical. This includes information about the following:

• Your financial situation
• Your investment objectives
• Limitations on risk

Be sure to update your broker if your financial condition, risk tolerance, or goals change.

Listen to Your Broker and Ask Questions

You should feel comfortable asking your broker questions. It's equally critical to listen to your broker. Be cautious of pressuring tactics and things that sound too good to be true. Understand the risks of your decision. Use common sense.

Review Materials From the Broker Carefully

Reviewing materials from the broker provides helpful information about your investments. This includes any of the following, including:

• Account statements
• Trade confirmations
• Correspondence

Be bold. Ask questions if you don't understand something. If something doesn't look right, inquire further until you understand the relevant materials.

Keep All Records

Keep and organize your records chronologically. Documents that will be useful include the following:

• New account agreements
• Account statements
• Transaction confirmations
• Notes of conversations with your broker
• Copies of all correspondence
• Any written material or research provided by the broker

If a dispute arises, resolving your claim will be much easier if you keep accurate records. Create a list of all financial records and accounts and instructions on how to access electronic records or accounts. This includes usernames, passwords, and PINs.

If a Dispute Arises, Act Quickly

Complaints should be made in writing following any dispute. The broker's supervisor and the firm's compliance department should also be notified. If the complaint is not resolved satisfactorily, you'll have a written record.

Get Legal Help If You Have a Dispute With a Broker

Do you still need help after notifying the broker and brokerage firm about an issue? If so, you may file a complaint. FINRA maintains an Investor Complaint Center. The Center helps you determine whether the complaint falls under the jurisdiction of FINRA, the SEC, or a state securities regulator.

FINRA, the SEC, and state securities regulators can investigate violations and bring disciplinary actions. But they can't pursue a claim for damages on an investor's behalf.

If you want to seek damages for your claim, you can pursue resolution through FINRA's dispute resolution process. Consulting a securities attorney can help. They will explain if any additional avenues for recovery are available.