Many contracts between investors and brokers require the investors to submit such disputes with their brokers to arbitration.Furthermore, the National Association of Securities Dealers (NASD) requires its members to submit to the process of arbitration if an investor files a complaint.
Arbitration has advantages over filing a lawsuit. Arbitration is a more simple process that does not require formal pleading rules, pretrial motions, or complex recovery. This simplified process can substantially reduce the costs involved in obtaining a decision. The NASD requires arbitration awards be paid promptly or the broker involved can face disciplinary proceedings, so it is often easier to collect an award given through arbitration than through the courts.
Time Limits
If you feel your stockbroker has acted inappropriately in regards to your finances, you have a limited amount of time in which to file a claim. Claims for securities fraud under Rule 10b-5 of the Securities Act of 1933 must either be brought within a year of the time the fraud should have been discovered or within three years of the occurrence, whichever is shorter.
Claims for common law fraud must be filed within three years of their discovery while claims for breach of fiduciary duty must be filed within four years.
Even with these time limits, there are some loopholes that allow claims to be filed later. If you have a claim that occurred outside the NASD time limits, you should still seek the advice of a lawyer who can tell you whether or not the time limits apply in your situation.
Remedies
One remedy that can be obtained from arbitration is out-of-pocket losses, which reimburses the investor for money invested minus the returns and residual value of the investment. Damages can also be awarded for profits the investor would have gained if the stockbroker had acted appropriately. Furthermore, arbitrators can award punitive damages and will do so where appropriate. They may also award attorneys' fees.
Detecting Stockbroker abuse
There are some things you can do, before you lose a lot of money, to determine whether or not your stockbroker is behaving appropriately.
- Examine the opening account form - This is a very important document in your relationship with both your broker and your brokerage firm. New account forms contain information regarding suitable investments for you, your risk tolerance, and the time horizon for investment and net worth. Make sure your broker explains these concepts to you; if he hasn't, that should raise a red flag.
- Examine every trade conducted by the broker on your behalf - Ask yourself if he called you before he placed the trade. Clients must be contacted before every trade is executed. Ask yourself if your broker called to discuss the general purpose for owning the security. Failure to do so can be negligence. Also ask yourself if your broker properly confirmed the trade as solicited or unsolicited. Solicited trades are those recommended by your broker, who has an obligation to mark this properly on every trade.
- Examine the commissions being generated in your account - Churning, which is excessive trading on an account so the broker can increase his commissions, should raise a red flag. You should not be paying more than 5% of the average value of your account in a given year to commissions. If you are concerned that your broker is churning your account, contact an independent investment professional to determine whether or not your broker is behaving appropriately.
- Be wary of letters from the management of your brokers' office - Management will contact you if your account has been identified as being involved in trading that is inappropriate for your profile. If you receive such letters from management you should immediately see an independent professional and review your account. Do not sign any papers until you have seen the independent professional and do not believe your broker if he calls to tell you that this letter is a "routine audit."