Magazine article The CPA Journal

Dealing with Your Securities Broker

Magazine article The CPA Journal

Dealing with Your Securities Broker

Article excerpt

Finding a Securities Broker It's your money. Do you have reason to trust your broker and the company he or she works for?

1. What you should learn about a securities broker:

His or her education

Professional licenses. Is he a licensed "registered representative" whose activities are regulated by the SEC, the National Association of Securities Dealers, Inc. (NASD) and the state Blue Sky Commissioners?

Experience in the business

Method of payment. Is it sales commissions: If he doesn't make the sale he doesn't get paid?

Financial consultant, financial adviser, and similar titles have no legal meaning.

2. Who does he work for? Is his company a licensed securities broker regulated by the SEC, the NASD, and the state Blue Sky Commission? Is the company a member of a securities exchange such as the New York Stock Exchange?

3. Establish your investment objectives. Bear in mind there is a risk in every investment.

Do you want income, long term growth, liquidity?

Are you willing to "speculate"?

4. Do you understand what you are buying?

Does the security fit your goals? What is the relationship between the broker and/or the company he works for and the company that issued the security you are investing in?

Is the security a bond, debenture, preferred stock, common stock, option, mutual fund or limited partnership? Is it derivative or hybrid? ("Sophisticated" is a dangerous word.)

Is it registered with the SEC? Is it legally tradeable? How long after you purchase it, can you sell it? As a practical matter, will there be a real market for it?

The Brokers Responsibility to You

When a securities broker "hangs out his shingle," he undertakes a fiduciary duty to his customers. He represents that he will deal fairly and in accordance with the standards of his profession.

A broker has an obligation "to know his customer." He must learn your financial circumstance so that he can properly recommend securities.

He must account for your money. He does this through periodic statements and confirmation slips of each transaction. Read them. Get an explanation if you don't understand them.

No half-truths. He must not make any untrue statement of a material fact, and must not omit to (state) a material fact necessary to make the statements (made) not misleading in the light of the circumstances under which they are made.

Your Responsibility in the Securities Transaction

You must act as a reasonably prudent investor. Don't check your brains at the door. Ask all the questions you want and feel comfortable that you understand what you are doing.

Don't misrepresent your financial circumstances and don't allow the broker to fill out anything stating your financial history that is false. Read, and at least think you understand, what you sign.

What to Do When Things Go Wrong

While most brokers are honest and dili gent, there are remedies for the mistakes of the honest and the frauds of the dishonest. Many of the violations of law by brokers are violations of technical rules intended to protect the customer. Here are some of the actionable violations.

1. Unsuitable Recommendations.

Investments must be "suitable" for the customer's portfolio. The "know your customer" rule requires that the broker only sell the customer investments suitable for his financial situation and investment objectives. …

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