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Responsibilities of Investors and Brokers

How can you avoid common investor problems and disputes with your broker? Many issues can be avoided by simply understanding the responsibilities that you and your broker have, prior to working with a broker. Here's a general overview of the main responsibilities of investors and brokers, according to the The Financial Industry Regulatory Authority (FINRA).

Investor Responsibilities

Investors shouldn’t enter into a broker relationship without preparation. While brokers generally have the knowledge and experience in investing, there are many steps that an investor can take to protect themselves.

  • Learn about investing. By becoming better informed through classes, seminars or even checking out books at the library, you’ll have a greater understanding of the process, the risks, and the jargon used by the broker.
  • Understand that all investments involve risk. There are many different types of risks involved in investing and it’s important to understand them all.
  • Investigate the broker and securities firm. Interview multiple brokers before deciding to go with one. Make sure you understand how they invest and how they charge for their services. Ask if they have ever been the subject of complaints and check their background.
  • Review new account documents carefully. Read everything, including the fine print. Make sure you understand in the terms of the documents before signing anything.
  • Do your research on any potential investment. Materials such as the prospectus, annual reports, or any other offering information, should be reviewed carefully. Make sure that you understand how the investment works and the risks involved before moving forward.
  • Give the broker complete and accurate information. This will include your financial situation, your investment objectives and your limits on risk. Be sure to update your broker if your financial condition or goals change.
  • Listen to your broker carefully and ask questions. 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. This includes all account statements, trade confirmations, and correspondence. Don't be afraid to ask questions if you don't understand something or if it doesn't look right to you.
  • Keep and organize your records chronologically. If a dispute arises, it will be much easier to document and resolve your claim. Documents that will be useful include new account agreements, account statements, transaction confirmations, notes of conversations with your broker, copies of all correspondence, and any written material or research provided by the broker.
  • If a dispute does arise, act and act quickly. Complaints should be made in writing, and the broker's supervisor should also be notified, as well as the firm’s compliance department. If the complaint is not resolved satisfactorily, you’ll have a written record of the issue.

Broker Responsibilities

Brokers owe customers particular duties of care. Understanding what the broker is obligated to do will help an investor know when a lapse has occurred.

  • Good Faith and Fair Dealing. Brokers must conduct their business in a manner that reflects honor and integrity. Brokers may not trade securities in your account without your permission, excessively trade to increase their commissions, or 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, and this information must be kept current.
  • Suitable Recommendations. Investment recommendations must be consistent with the customer's financial condition, investment objectives, and risk level.
  • Duty of Loyalty. Brokers must put the customer's interests first.
  • Obligation of Disclosure. Brokers must be truthful in their dealings with customers, and disclose to them material information reasonably related to an investment decision. This includes the risks of such a decision.
  • Authorization for Trading. Brokers can only execute trades to the extent that they have received permission from the customer to do so.

In addition, the brokerage firm has a duty to supervise the broker and have in place a compliance system to ensure that brokers don't violate securities laws and regulations.

What If You Can't Resolve a Dispute With a Broker?

In the event that a matter can't be resolved with the broker after written notification to the broker and brokerage firm, FINRA maintains an Investor Complaint Center. The Center provides guidance on whether the complaint falls under the jurisdiction of FINRA, the SEC, or a state securities regulator, and instructions on how to file a complaint. 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 investors want to seek damages, they can initiate mediation or arbitration through FINRA. Consultation with a securities attorney may also be advised to determine if any additional avenues for recovery are available.

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