It is the broker's responsibility to make sure that he or she understands what is suitability for your investments. Stockbrokers and investment advisors must have a reasonable basis for their recommendations. To form that reasonable basis, the broker must attempt to learn about your financial situation and investment objectives. Financial Industry Regulatory Authority (FINRA) rules require that a broker attempt to learn about your:
2. financial status;
3. tax status;
4. investment objectives; and
5. other information considered reasonable by a broker in making recommendations to you.
What does my stockbroker have to do with the information about me he or she collects?
Your broker must analyze the information that you provide to determine whether his or her recommendation is right for your specific circumstances. Thus, if a broker 'cold-calls' you with a recommendation without first inquiring about your financial situation and investment objectives, that broker has likely violated the suitability rule. It is a good idea not to do business with that broker.
You may notice suitability problems in your account during your monthly account review, when you learn that an investment is too risky for you, or if your tax professional or someone else tells you there might be a problem. If you see a potential problem, consult with a qualified attorney who is experienced with securities related suitability issues and who can help you decide if you want to sue your broker.
Unauthorized Trading. Have you ever been surprised when you saw a trade in your account when you knew nothing about the investment made? If so, it may be that your broker made an unauthorized trade in your account. Any unauthorized trade in your account is a violation of FINRA's prohibition of unauthorized trading and can be a good reason to sue your broker to recover losses.
Just because your broker called you and told you about the trade after it was done does not mean it was an appropriate trade. If you see a trade you don't recognize in your account tell your stockbroker as soon as possible and insist that he correct the mistake immediately. If you do not dispute the trade, the broker will say that you 'ratified,' or accepted the trade so disputing the trade is important. However, even if the trade happened some time ago, the broker's defense of ratification does not always prevent you from pursuing a reimbursement claim.
Stock Performance Guarantees?
Too often a broker will promise you that the stock will go up and that 'you can't lose, guaranteed.' In the stock market it is impossible to guarantee anything and if your broker did make a guarantee, he or she has probably overreached and made a material and illegal misrepresentation. If your broker guaranteed an investment's performance, he or she has not only broken FINRA rules, he or she may have violated the policies of their brokerage firm. In the case where your broker made a guarantee you may have a basis to sue your stockbroker.
If your stockbroker or other investment advisor constantly bought and sold investments in your account he or she may have been 'churning' your account. Churning means that the broker is excessively trading your account without considering your best interests. Instead, the broker's primary objective becomes generating commissions. If you have trusted your stockbroker or advisor and accepted all the recommendations that he or she made, your stockbroker may still have churned your account. This is true because your stockbroker may have had effective control over your account. You may want to sue your broker for churning and try to recover some or all of your losses and commissions paid.
Material Omissions and Misrepresentations?
If your stockbroker misrepresented the level of risk in an investment or omitted to give you important information, you relied upon the omission or misrepresentation, and the information would have been or was material to your investment decision, you broker has probably violated FINRA and internal brokerage firm rules.
For example, a misrepresentation might have occurred if your broker assured you that an investment was quite safe and you later learned that the investment was not very safe at all. An example of a material omission might be your broker failing to tell you that the company he is recommending recently announced they were going to have to 'restate' their past years' financial statements due to an accounting irregularity. Normally, you would not become aware of an omission or misrepresentation until after stock has failed to perform as anticipated.