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Types of Broker Malpractice
What are Types of Broker Malpractice?
Rumors, Knowingly False and Misleading Statements - A broker must perform due diligence on a security before recommending it for sale. A broker must present both sides of the coin, the good and the bad, when recommending a security. A broker cannot make false or misleading statements about a company. A broker cannot sell a security based on what “might happen” at a company or on rumors.
Unauthorized Transactions - A broker cannot perform a transaction without clearing that transaction with you unless you have given the broker limited or full power of attorney to place orders in your account.
Switching of Mutual Funds - Some brokers will induce their clients to switch funds outside their initial mutual fund family. This can be done to increase the commissions available to the broker. Please note, that most mutual funds families allow their investors to reallocate their investment throughout their family of funds for free or for a small transaction fee. This ability to shift assets within the same family of funds allows the investor to change their financial objectives without generating large sales charges.
Example. Steve has a tech fund with company A. Steve wants to shift to a blue chip fund. Company A offers a blue chip fund. If Steve were to switch to company A’s blue chip fund he would pay only a small transaction fee. However, Steve’s broker convinces him to change to Company B’s blue chip fund. Steve is forced to pay heavy commissions due to this switch.
Breach of Fiduciary Duty - All stock brokers have a fiduciary duty to their investors. These duties include:
- the duty to recommend a stock only after studying it sufficiently to become informed as to its nature, price, and financial prognosis.
- the duty to carry out the customer's orders promptly in a manner best suited to serve the customer's interest.
- the duty to inform the customer of the risks involved in purchasing or selling a particular security.
- the duty to refrain from self-dealing and to disclose any personal interest the broker may have in a particular security.
- the duty not to misrepresent any fact material to the transaction.
- the duty to transact business only after receiving prior authorization from the customer.
Selling Away - A broker should not sell securities that are not held or offered by his company.
Mis-marking of order tickets and confirmations - Brokers must mark their orders as solicited or unsolicited. Some brokers will improperly mark their tickets to protect them from scrutiny by compliance officers at the firm.
Others:
Sharing in Accounts: The sharing of profits and losses with a customer is prohibited.
Parking Securities: Holding or hiding securities in a client’s account is prohibited.
Disclosure of All Commissions: A broker should always disclose his commissions.
