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Securities and Exchange Commission

Broker Client Relations FYI

  • Have You Lost Money With Brokers?
  • Broker Licensing
  • State Licensing
  • Firm Approved List
  • Solicitation & Know Your Customer Rule
  • New Account Form
  • Arbitration vs. Court
  • Unauthorized Trades
  • What To Do

Have You Lost Money With Brokers?

The brokerage profession is an honorable profession, filled with honorable, hardworking individuals. I find them to be smart, experienced, and well intentioned. For the most part they possess integrity. The problem is the Faustian bargain they must strike by the very nature of their work.

If you have never worked in a brokerage firm, then you have no idea what the profession is all about. We have probably been responsible for the hiring, and career paths of over 1,000 stockbrokers in the United States and abroad. What we are about to tell you is the inside story of how the profession operates.

Broker Licensing

First of all, just about anybody can be a stockbroker. I know taxi drivers who are stockbrokers. To be a broker you must pass one of two tests. The most common test is the Series 7, which is the test over 95% of stockbrokers have taken and passed. The second license is a more restrictive license that limits the person possessing it to sell, and buy certain investment vehicles for customers.

State Licensing

A broker must be licensed in the state he is doing business. This means that if the customer is based in Georgia, and the broker is in New York, both the firm and the broker must be licensed in the state of Georgia to do business in Georgia. This is important. If your broker is not licensed in the state you are living in, or if the firm is not licensed in that state, then guess what? YOU CAN GET ALL YOUR MONEY BACK, ON ANY TRADE THAT YOU LOSE MONEY ON. This is called the right of recission.

Less than one customer out of 10,000 know about this right. In fact most lawyers do not know about this right. This means you have a permanent put option on the trade.

There's a third part to this story. The security your broker is buying you must also be licensed in the state the customer is purchasing it. This is called blue-sky laws. You should know that all listed stocks have automatic blue-sky status in every state. There are, however ,thousands of smaller stocks that do not have blue sky status in the various states.

Keep this in mind. You could get your money back, all of it. If the smaller securities you own do not have blue sky status in your state, you can automatically get your investment back. It's open and shut.

Firm Approved List

Brokers are given a list of approved stocks to purchase by the firm they work for. If a broker wants to buy a security for a customer that is not on the approved list, they must usually get approval from the firm. If a broker buys you a security that is not on the approved list of his firm, then there's something else he must do. He should mark your ticket solicited. This means he asked for the trade.

Some brokers will mark the ticket unsolicited in an attempt to make it look like the client asked for the trade. This allows him to process the trade more easily for his firm. It also allows him to attempt to limit his liability.

In reality, his liability is not limited. If he recommends the stock, then the trade is solicited, and you should remember the difference. Look at your confirms, if it says unsolicited and the stock was recommended by the broker, then the broker is playing games. Beware!

Solicitation & Know Your Customer Rule

The reality is that if the broker picked the stock, then the trade is solicited. A trade can't be unsolicited if the broker proposed the transaction. Think about this, it's important.

The NASD, which is the National Association of Securities Dealers, has a "know your customer rule". The New York Stock Exchange (NYSE) has the same rule. This means the broker must know who you are. The broker attempts to fulfill the requirement of this rule by filling out a new account form.

New Account Form

In any litigation that takes place between the brokerage firm and the customer, this new account form will become a central part of the proceeding. A new account form contains the information that you think it should contain.

What you should be aware of is the following. They will ask you your investment objectives. If you tell them long-term and preservation of capital, then that's the objectives the broker should follow. If an account that specifies long-term and preservation of capital starts to do option trades, then the new account form should be changed. In litigation a broker would have a very difficult time defending trades he recommended that conflicted with the objectives on the new account form.

You should keep notes on all conversations you have with your brokers. It does not have to be complicated. We would tell you to use a spiral book of some kind. Do not use a loose-leaf binder with removable pages. These notes will be crucial if you ever wind up in court. The spiral makes the records complete and unchangeable. A judge and jury will assume that a loose-leaf can have its contents changed.

Arbitration vs. Court

By the way, usually you do not wind up in court. You wind up in arbitration. When you open an account with a broker, you usually sign a customer account agreement. I have never seen such an agreement that did not provide for arbitration as opposed to a courtroom setting. Why? Well, it's because courtrooms are much more expensive than arbitration. It's also because an arbitration panel favors the brokerage firms as opposed to the customers. If you do as we have instructed, you'll win in arbitration.

Unauthorized Trades

There are times when a customer receives a confirmation in the mail for a trade that the customer did not authorize. If this ever happens to you, you must act immediately. Do not wait, an unauthorized is not something you meditate on. It requires immediate and decisive action.

This is what you must do:

  • Contact your broker immediately. Tell him or her you want the trade rectified immediately.
  • Ask him to fax you a note that the trade is being corrected. If you don't have a fax machine, have him write you a note and send it to you. It could be handwritten, it doesn't matter.
  • If you don't get a written response, write your broker immediately. Call the office and get the name of the office manager and compliance manager. Send them copies of the letter you sent the broker.
  • Still no response, you must write a letter to the NASD and the SEC.
Remember, get everything in writing, nothing should be verbal. Keep notes on every conversation. It's your money, it's your responsibility.

The key is, you must generate action. You must get the trade changed. You must get it done immediately. If you hesitate, if you wait, you are finished. I say this because there are many unscrupulous people in every profession. You must beware of some people. Trust your instincts.

You can not wait months to get corrective action. There is one thing you must guard against. Do not take people's verbal words during this situation. Verbal words mean nothing. If you ever wind up in court or arbitration, you want to show in writing the corrective action that you took. This is important, trust your instincts.

What To Do

If you feel that you have been mistreated by your broker, and you would like a professional opinion, then just email us. We would be more than willing to assist you as to your alternatives. Contact us at sabsupport@valuestockplayers.com.

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