Q: How can I find out if my stockbroker is licensed to sell securities and whether any disciplinary action has been taken against her?
Every stockbroker (“registered representative”) who is licensed to sell securities has what is a called a “CRD” number. CRD stands for the Central Registration Depository, a database containing the registration records of more than 6,800 broker-dealers and 660,000 securities representatives. You can use your broker’s CRD number to confirm whether she is registered in Ohio, learn what licenses she possesses, and to find out if she has received any customer complaints or has had disciplinary actions taken against her. You can also use this database to find information about her qualifications and employment.
Further, you can visit the Financial Industry Regulatory Authority’s (FINRA) website to pull up records of any brokers you are considering working with. You should also ask the Ohio Division of Securities for a copy of the CRD report, because the reports from the state regulators often provide more information from the CRD than FINRA, especially regarding customer complaints.
Use this CRD system to check out a broker before making any investments. If the broker refuses to provide you with his or her CRD number, that should be a red flag.
Q: What duties and responsibilities does my stockbroker and brokerage firm owe to me as a customer?
A: Although stockbrokers are not guarantors of the investments they recommend, they do owe their clients significant legal responsibilities. The securities industry rules require a stockbroker to treat his or her customer in a fair and honest manner, placing the customer’s interests first. Before making an investment recommendation, brokers also must disclose all material information about the investments and explain the various types of associated risks. Brokers may not make an investment recommendation without first determining that the investment is appropriate based on the customer’s financial situation, investment goals and risk tolerance. These rules, along with other securities industry regulations, are legally enforceable by the customer.
Q: I think I may be a victim of securities fraud/investment misconduct. What are my options?
A: You should file a complaint (either online or through the mail) with the Ohio Division of Securities (ODS) to alert the agency that Ohio securities laws may have been violated. The ODS has the authority to bring administrative actions and may refer matters to the prosecutor’s office for criminal prosecution. The ODS serves as the investment police; they investigate and prosecute violations of law. However, it is important to understand that the ODS does not have the authority to recover money for investors who have suffered losses as the result of investment misconduct. In order to recover losses, you must pursue a private legal action.
Q: If I believe I may have a legal claim against my stockbroker or brokerage firm for violations of the securities laws or regulations, can I file a lawsuit in court and have a jury or judge hear my case?
A: Probably not. Virtually all of the account opening documents at brokerage firms and other financial institutions contain what is a called a mandatory arbitration provision. This provision requires all disputes between the parties to go through an arbitration proceeding instead of a court of law with a judge and jury. Securities arbitration is a very specialized area and is regulated and administered by the Financial Industry Regulatory Authority (FINRA), which is the largest non-governmental regulator for all U.S. securities firms.
In securities arbitrations, the dispute is resolved by “arbitrators” appointed by FINRA, as opposed to a jury or a judge. Typically, a three-member arbitrator panel of arbitrators holds a hearing in the major city closest to where the investor lived when the dispute arose. Both parties take part in the arbitrator selection process by ranking and striking arbitrators from an FINRA-provided list. the investor has the option of selecting an "all-public" three-member panel of arbitrators, none of whome participates in the financial industry. Hearings are conducted in a conference room rather than a courtroom. After the final hearing, the arbitration panel deliberates and issues a decision within 30 days. From filing to resolution, the average FINRA arbitration currently takes 14.3 months, which is much quicker than a typical court case.
If an investor seeks damages of less than $50,000, he or she has the option to proceed with a FINRA "simplified arbitration." One public arbitrator will decide the claim and issue an award based on the parties' written submissions. Simplified arbitrations proceed more quickly than regular arbitrations, and the average turnaround time for simplified cases if just seven months.
Q: If I am not happy with the arbitration results, is there anything I can do?
A: Usually not. The results of the arbitration are binding on the parties and it is very difficult to appeal an arbitration decision. However, one benefit of the binding nature of arbitration decisions is that, if the investor obtains an award against the brokerage firm, the firm must pay that award within 30 days or face regulatory suspension.
This “Law You Can Use” column was provided by the Ohio State Bar Association (OSBA). It was prepared by David P. Meyer, founding principal of the Columbus law firm of Meyer Wilson Co., LPA, whose practice focuses on investors’ claims against financial advisors, stockbrokers and brokerage firms.