What is the Difference Between Solicited & Unsolicited Trades?

Ideally, hiring a skilled broker takes some of the risk out of investing. Unfortunately, however, some brokers fail to act with the appropriate level of integrity. As an investor, it’s very important to understand the difference between solicited and unsolicited trades. The distinction has significant consequences on your ability to recover losses from a bad trade. What’s the Difference Between a Solicited and an Unsolicited Trade? The main difference between a solicited and unsolicited trade is: a solicited trade is a transaction that the broker recommends to the client. In contrast, an unsolicited transaction is one that the investor initially proposed to the broker. Need Legal Help? Let’s talk. or, give us a ring at 561-338-0037. In regards to solicited trades, the broker is ultimately responsible for the consideration and execution of the trade because he or she brought it to the investor’s attention. The responsibility for unsolicited trades therefore lies primarily with the investor, while the broker merely facilitates the investor’s proposed transaction. Why does the Difference Between an Unsolicited and Socilited Trade Matters? The status of a trade as solicited or unsolicited is hugely important when an investor claims unsuitability. An investor who wants to recover losses may be able to do so if the broker is the one who initially suggests the transaction. Take the following example. You purchase $150,000 of stock in a new company. Shortly after the trade is complete, the stock loses nearly all its original value. As an investor, you will want to recover as much of that loss as possible. One way is to file a claim against your broker on the basis that the stock was an unsuitable investment. When you say that an investment was unsuitable, you are essentially saying that based on the information your broker had about you as an investor, the broker should not have made the trade in the first place. If the stock purchase was at your request—that is, it was unsolicited—then it’s unlikely you’d be able to hold your broker liable for your losses. After all, the trade was originally your idea.  IMPORTANT: If the stock was suggested to you as a good investment by your broker, however, then you may have an argument that you were pushed into a solicited trade that was not in your best interests. If this is the case, you would have a much stronger argument for holding your broker liable. What Is Suitability? The Financial Industry Regulatory Authority (FINRA) imposes rules on registered brokers to protect investors against broker misconduct. Under FINRA Rule 2111, brokers are generally required to engage in trades only if the broker has “a reasonable basis to believe that the recommended transaction or investment strategy involving a security or securities is suitable for the customer.” Whether an investment is suitable depends on diligent consideration of several aspects of a client’s investment profile, including: The investor’s age; Other investments, if any; The investor’s financial situation and tax status; The investor’s individual investment objectives; The level of investing experience or sophistication of the investor; The investor’s risk tolerance; and Other relevant information the investor discloses to their broker. When a broker makes a trade without a reasonable basis for believing that the trade is suitable, the broker violates FINRA Rule 2111. Investors may then be able to recover losses from the broker, and FINRA may impose sanctions, suspension, or other penalties on the broker. Broker Obligations to Their Clients When a broker conducts a trade on behalf of an investor, the broker uses an order ticket with the details of the trade. Brokers mark these tickets as “solicited” or “unsolicited” to reflect the status of the trade. For the reasons explained above, this marking is very important. On one hand, it protects a broker from unsuitability claims following a trade suggested by the broker’s client. On the other, it provides an avenue to recover losses in the case of a solicited trade that turns out poorly. FINRA Rule 2010 covers properly marking trade tickets. This rule requires brokers to observe “high standards of commercial honor and just and equitable principles of trade” in their practice. If a broker fails to properly mark a trade ticket, that broker violates Rule 2010. As an investor, you should always receive a confirmation of any trades your broker conducts on your account.  FINRA has found that abuse of authority by mismarking tickets is an issue within the securities industry. The 2018 report found that brokers sometimes mismarked tickets as “unsolicited” to hide trading activity on discretionary accounts. If your broker feels the need to hide a trade from you, that trade is likely unsuitable. How to Protect Yourself Against Trade Ticket Mismarking Whether your account is discretionary or non-discretionary, and whether you’re new to investing or a skilled tycoon, you should always pay close attention to your investment accounts. Carefully review your trade confirmations to make sure that all trades are properly marked. If you find a mistake, immediately report it to your broker or the compliance department of their brokerage firm. It’s their job to correct these mistakes and make sure they don’t happen in the future. Negative or suspicious responses to a legitimate correction request are red flags that should not be ignored. If you discover your broker intentionally mismarking your trade tickets, contact an investment fraud attorney immediately. Concerned About a Solicited Trade? The Law Offices of Robert Wayne Pearce, P.A., have been helping investors recover losses for over 40 years. We have extensive experience representing investors and have helped our clients recover over $160 million in total. If you’ve become the victim of unsuitable or fraudulent investing, we can help you. Contact us today or give us a call at 561-338-0037 for a free consultation.

Continue Reading

Everything You Need to Know about an SEC Wells Notice

If you’ve received a Wells Notice from the SEC, it’s important to understand what it is and how to respond. What is a Wells Notice? A Wells Notice is usually a formal letter (sometimes just a telephone call) in which the staff enforcement attorneys of the U.S. Securities and Exchange Commission (SEC) notify individuals and/or firms that they are planning to recommend that the SEC authorize the attorneys to bring an enforcement action against the individual and/or the firm.  Investment Losses? Let’s talk. or, give us a ring at 800-732-2889. A Wells Notice will typically set forth the specific allegations against the individual and/or firm, as well as provide an opportunity for a response before the SEC makes a final decision on whether to bring charges. After an SEC investigation has turned up evidence of potential securities law infractions, the staff enforcement attorneys will usually provide a Wells Notice but, not always! Note: If you have received a Wells Notice, it means the SEC enforcement attorneys believe you have been violating securities laws and regulations, it is not a finding of guilt. It is important that you act quickly and consult with an experienced securities defense attorney to protect your rights and interests. What information is contained in a Wells Notice? A Wells Notice from the SEC will usually contain the following information: Identify the specific charges against the individual or firm that the SEC Enforcement Division is considering; Notify the recipient of the Wells Notice the opportunity to provide a written or videotape voluntary statement defending their actions (which may or may not include arguments why the Commission should not bring an action or why proposed charges or remedies should not be pursued, or bring any relevant facts to the Commission’s attention in connection with its consideration of the matter); Provide a reasonable time period for the recipient to prepare and submit their response; Advise the recipient that any submission should be addressed to the appropriate Assistant Director; Inform the recipient of the Wells notice that their Wells submission may be used by the Commission in any action or enforcement proceeding; An attached copy of the Wells Release; and An attached copy of the SEC’s Form 1662. The majority of what appears in a written Wells notice is boilerplate. Typically, the written notice details statutory and regulatory infractions under consideration but does not allude to the specifics of the specific case. Are public companies required to disclose a Wells Notice? A Wells notice is a private communication to the recipient, and the Commission will not disclose it. In the past, many companies elected to not make any public disclosure of a Wells Notice. However, in recent years, some companies have voluntarily disclosed the receipt of a Wells Notice in their public filings with the SEC. Generally, such disclosures are a discretionary choice, rather than a requirement. The decision turns on whether the investigation and potential consequences would be a material fact that needs to be disclosed in light of other statements being publicly made by the company. Are registered broker-dealers and investment advisors required to disclose a Wells Notice? Yes, if you are a registered broker-dealer or investment advisor, you will be required to disclose the receipt of a Wells Notice in your Form U4. Related Reads: SEC Subpoenas: How to Respond How to Respond to a Wells Notice If you’ve received a Wells Notice, the first thing you should do is consult with an experienced securities defense attorney. Your attorney will help you understand the specific allegations against you and decide whether you should respond at all. If so, the attorney will craft a strategic and customized response on your behalf. Your response to a Wells Notice (also known as a Wells Submission) will be incredibly important in determining whether or not the SEC takes enforcement action against you. In some cases, a well-crafted response may convince the SEC to drop the matter entirely. In other cases, it may result in a more lenient punishment if the SEC does decide to bring charges. Before responding to a Wells Notice, you and your attorney will need to carefully review all of the evidence collected during the SEC’s investigation. This may include: Understanding the specific charges the SEC Enforcement Division is considering filing against you The limitations established for the Wells notice disclosure The deadline for submitting your Wells Notice disclosure to the SEC Once the analysis of the evidence is complete, your attorney will work with you to prepare a persuasive response that addresses the SEC’s specific concerns. This is a very important step as a Wells Submission presents the facts and the first arguments to persuade the SEC Enforcement Division to not pursue an enforcement action or to recommend a less severe action. The SEC will review the response and make a final determination on whether or not to bring charges. Even though the Wells Notice process is confidential, it may become public if the SEC decides to bring an enforcement action against you. More important, whatever is written in the response to the Wells notice could be deemed an admission of the facts stated within the Wells Notice. What Happens if the SEC decides to bring Charges? If the SEC decides to bring charges after you’ve received a Wells Notice, it will file a formal complaint against you in federal court or administrative proceeding. At this point, you will have an opportunity to defend yourself against the SEC’s charges. This is a complex process, and you will need to have an experienced securities defense attorney by your side to protect your rights and help you navigate the legal system. A Wells Notice is just the beginning of the SEC’s enforcement process, but it’s a very important step. If you’ve received a Wells Notice, make sure you consult with an experienced SEC defense attorney as soon as possible to ensure the best possible outcome in your case. Consider Consulting with an Experienced SEC Defense Attorney If you’ve received a Wells Notice, you should consult with an experienced...

Continue Reading

What to Do When a Financial Advisor Steals Money From You

Financial advisors are highly trusted professionals who help make decisions that impact your economic future. When that trust is broken through a bad or negligent act, the investor suffers and the financial advisor must be held accountable. When you’re looking at your investment losses, in the worst-case scenario, you may be asking yourself if a financial advisor can steal your money. Can Financial Advisors Steal Your Money? Yes, an unethical financial advisor can be in a position to steal money from you, especially if you have given them direct access to your money. Because of this, a vast majority of reputable financial advisors never take ownership of your money to protect your best financial interests. Need Legal Help? Let’s talk. or, give us a ring at 561-338-0037. It is recommended that you always keep control over your investments and never give any financial advisor full discretion over your accounts. Giving an advisor direct access allows them to steal money with ease. Avoid doing so unless you’re 100% confident in the individual you’re dealing with. Note: If you believe your financial advisor stole your money, there are several options for you to recover. We recommend speaking with an experienced investment fraud lawyer to learn more about your rights and how you may recover your losses. The Fiduciary Duty of a Financial Advisor All financial advisors are held to a standard of care when dealing with investors. Registered financial advisors have a higher fiduciary duty to their clients under the Investment Advisers Act of 1940. This is the highest legal standard of care and requires financial advisors to act in the best interest of their clients, make suitable investments, and disclose relevant information to you.  Knowing whether your financial advisor is registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator is important because if the advisor breaches the fiduciary duty, you can bring a claim against the financial advisor through the Financial Industry Regulatory Authority (FINRA). FINRA is the governing organization that creates and enforces rules for advisors and their firms and assists in resolving disputes between advisors and investors.  Do You Have a Claim? If your financial advisor outright stole money from your account, this is theft. These cases involve an intentional act by your financial advisor, such as transferring money out of your account. However, your financial advisor could also be stealing from you if their actions or failure to act causes you financial loss.   Losing money through investment is not enough to bring a claim against your financial advisor. Remember, there is no guarantee of return when investing. Even if your financial advisor made the recommendation, under federal securities law and FINRA regulations, you cannot hold your advisor liable simply because they lost you money. You need a viable cause of action, such as a breach of fiduciary duty, negligence, or malpractice. Types of Claims Against Your Financial Advisor  Understanding securities law and FINRA regulations are crucial to know whether you have a valid claim against your financial advisor. The investment loss recovery attorneys at The Law Offices of Robert Wayne Pearce P.A. have over 40 years of experience in securities and investment law. They have helped countless investors recover their financial losses caused by bad or negligent acts by their financial advisors. The Law Offices of Robert Wayne Pearce P.A. have handled hundreds of cases involving many types of misconduct by financial advisors. Negligence In a negligence claim, you do not need to show that the financial advisor intentionally acted in a harmful way, but rather that the advisor failed to do something they had an obligation to do and caused the economic loss. For example, your advisor may have made an unsuitable investment by failing to take into consideration your risk tolerance. If you lost money based on the recommended investment, it may be appropriate to file a claim for negligence against your financial advisor.  Breach of Fiduciary Duty A financial advisor who breaches his fiduciary duty has failed to meet the required standard of care. You may have a valid claim for breach of fiduciary duty if your advisor failed to execute your stated objectives or did not disclose information about a product. Other examples of breaching the fiduciary duty include: Unauthorized trading, Unsuitable investments,  Undiversified portfolio, and  Account churning.  In each of these instances, the financial advisor did not act in your best interest.  Failure to Supervise A brokerage firm is responsible for supervising the actions of its financial advisors and any other employees. If the firm fails to do this, it can be held liable for your financial losses.  What You Can Do There are several stages of resolution to recover your financial losses. Depending on the facts of your case, you may be able to resolve it and recover without any formal proceedings, or you may have to litigate. The attorneys at The Law Offices of Robert Wayne Pearce P.A. have helped investors in all stages and have successfully recovered over $160 million in losses for our clients.  Review Customer Agreement If you believe your financial advisor stole money from you, either directly or indirectly through losses in your account, you should first review your customer agreement. Understand what sort of authority you gave your financial advisor and if there is a mandatory arbitration clause. This clause is common in most customer agreements with brokerage firms. These clauses often state that you waive your right to file a lawsuit against your advisor and agree to engage in a FINRA arbitration proceeding instead.  Informal Dispute Resolution Claims against financial advisors are incredibly complex legal matters. There are informal options available, however. Even at this stage, you should contact an investor loss recovery attorney for assistance. FINRA, which regulates the investment industry, instructs investors to first pursue informal dispute resolutions before filing a claim against their financial advisor.  Depending on the severity of the financial advisor’s misconduct, you may be able to resolve the matter directly with your advisor or...

Continue Reading

How to Sue a Financial Advisor or Stockbroker Over Investment Losses

If you’ve lost a significant amount of money in your investment portfolios, you could be wondering if you can sue your financial advisor or broker to help recover those losses. While every case is different, there are a number of factors that will influence whether or not you have a successful lawsuit. In this article, we will discuss some of the key things to consider if you are thinking about suing your financial advisor or stockbroker. Can I Sue My Financial Advisor? The short answer is yes, you can sue your financial advisor if you have suffered losses as a result of your advisor – or the financial institute they work for – actions or inaction. Securities and investment claims in the United States are usually resolved through FINRA’s arbitration procedure. Investment Losses? Let’s talk. or, give us a ring at 561-338-0037. IMPORTANT: If you are considering suing your advisor, it is important to seek legal counsel. Do not file without legal representation. Securities is a complex area of law, and without an experienced investment loss attorney, you may not be able to recover the full extent of your losses. A Financial Advisor’s Duty of Care People hire financial advisors and brokers to grow and protect their money. Financial advisors have advanced education and training, which should provide their clients with valuable insight and accurate financial advice. Individual investors expect that their advisors will not defraud or harm them in any other way. Market volatility is difficult to predict with any certainty. Markets dip and rebound over time. A financial advisor must guide you through those difficult times and offer you sound investment advice to minimize or avoid losses.  Some investments are riskier than others. Brokers and financial advisors need to understand their clients’ risk tolerance, as well as their clients’ investment needs. Losses could ruin years of hard work and financial planning.  Market volatility is one thing—negligence, deception, and fraud are something else entirely. Therefore, you should review your portfolio closely to see if you are a victim of misconduct.

Continue Reading

How to File a SEC Complaint or Report Fraud Against a Broker

Your investments are important—that’s why so many individuals hire investment brokers and financial advisors to manage their investment accounts.  Having a qualified broker can be a great advantage to the growth of your investments. Unfortunately, however, investment and securities fraud remains a common and serious issue in the United States each year. So what do you do if you are a victim of investment fraud at the hands of your broker?  The U.S. Securities and Exchange Commission (SEC) has a mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. In furtherance of this goal, the SEC allows individual investors to file complaints against their broker or their broker’s firm. If your broker committed negligence or broker fraud, you may be entitled to file a complaint and recover your losses. Violations of securities law can be reported to the SEC, which will conduct a comprehensive investigation.  Looking for information on how to file an SEC complaint against a broker? Look no further than the Law Offices of Robert Wayne Pearce, P.A. Not only can our attorneys help you report your broker, but we can also help you recover your investment losses.  Filing a complaint against your broker with the SEC can be a great way to hold them accountable and put future investors on notice of their wrongdoing. However, doing so doesn’t necessarily help you get your money back. Contacting an attorney, however, can be the first step toward actually recovering your personal investment losses that you suffered at the hands of your broker.  Stockbroker fraud attorney Robert Wayne Pearce has over 40 years of experience handling complex securities, commodities, and investment arbitration and litigation cases. He has helped countless clients through their investment-related disputes, and he will fight to do the same for you. Please don’t hesitate to send us an online message or call (800) 732-2889 today for assistance. Why Would I File a Complaint? There are numerous reasons you may need to file a complaint with the SEC against your broker. Common examples of wrongful actions by a broker or brokerage firm include: Offering fraudulent or unregistered securities;  Misappropriating client funds; Insider trading; Making false or misleading statements; and Failing to file required reports with the SEC. Of course, not all actions by a broker constitute fraud for which you can file a complaint with the SEC. Remember, the stock market is inherently volatile, so the fact that you lost money does not necessarily mean your broker took any wrongful actions.  An experienced investment fraud attorney can help you determine whether filing a complaint with the SEC against a broker might be warranted. Filing a Complaint with the SEC Against a Broker: What You Need to Know If you suffer financial losses due to the negligence or misconduct of a broker or brokerage firm, filing a complaint with the SEC against the broker can be an important step to take.  Not only can this help prevent future investors from being subject to the same fraudulent and predatory actions, but it may also provide you with an avenue to recover your losses. How to File a Complaint Against a Broker The first step in reporting your broker for fraud or misconduct is to file your formal complaint with the SEC.  The SEC provides an opportunity for members of the public at large to submit broker complaints electronically using the SEC’s Investor Complaint Form.  What to Include in Your Complaint The Investor Complaint Form may appear simple to complete. However, there is more to it than you might think.  The form requires basic information such as: Your name and address; Basic information about your broker; The type of investment involved; A brief description of the events giving rise to your complaint; and Any actions you may have already to resolve your complaint against your broker, such as mediation, arbitration, or court action. The complaint form can play a vital role in whether the SEC allows your case to move forward. Thus, the more information you are able to provide, the better equipped the SEC will be to investigate your complaint. An experienced investment fraud attorney can be a great benefit to you as you complete your Investor Complaint Form and move forward in the process.  What Happens After Submitting My Complaint to the SEC After the SEC receives your complaint, they will thoroughly investigate your claim and all relevant evidence.  Central to the process is confidentiality. The SEC conducts its investigations in a manner that will protect the parties and preserve the integrity of the complaint process.  Then, depending on the allegations asserted in your form, the complaint will be referred to the appropriate SEC office. The Office of Investor Education and Advocacy The Office of Investor Education and Advocacy handles basic investor questions regarding securities law and complaints related to financial professionals. These SEC officers will also advise complainants of possible remedies and, in some cases, will intervene on your behalf and reach out to brokers or other financial advisors concerning the issues raised in your complaint. This office may also refer your complaint to another division of the SEC for resolution. Enforcement Division The Division of Enforcement, on the other hand, employs attorneys to review information and tips regarding securities law violations.  Officers in this office investigate the claims in their entirety, retrieving whatever evidence may be necessary. Again, it is important to note that the investigations conducted by the SEC are typically confidential unless made a matter of public record.  After completing a thorough investigation, the Enforcement Division may recommend that the SEC bring civil actions in federal court or before an administrative law judge to prosecute securities law violations.  Why Hire an Investment Loss Attorney to Assist with Complaints Against Your Broker? Reporting the fraudulent misconduct of a broker to the SEC is important. However, filing an SEC complaint is not the only way to hold a broker or brokerage firm accountable.  In fact, in some cases, filing an SEC complaint...

Continue Reading

Tips for Hiring the Best Structured Product Investment Lawyer

Investment vehicles come in a variety of forms, each with their own benefits and risks. Structured products are one such vehicle. These products can offer a compelling return, but at the cost of increased risk and complexity. If you lost money on a structured product investment, you may be able to file a claim to recover losses with the help of an investment lawyer. What Is a Structured Product? In short, a structured product is a type of security derived from or based on one or more other securities. The defining feature of a structured product, however, is that its return is based on the performance of the underlying asset. Structured products offer a great deal of customization that allows brokers to tailor the risk profile to each individual investor. At the same time, however, they are complicated securities with a level of risk that make them inappropriate for many investors. This complexity makes it more important than ever to make sure you have the best investment lawyer if you lose money on one of these products. Tip #1: Make Sure They Are Familiar with Structured Product Investments As explained above, structured product investments are fairly complex. Your investment lawyer needs to understand that complexity to properly represent you. Even if most investment lawyers are generally familiar with different investment products, a structured product investment lawyer will have additional experience working on cases involving these securities. Tip #2: Make Sure They Understand the Specific Risks of Structured Product Investments As an investor, you’ve no doubt been told many times about the risks involved with particular investments. Your investment lawyer should have the same understanding of those risks. Not only will this allow the lawyer to better understand your particular situation, it also means they will be more familiar with the ways in which a broker may cause you to lose money. For example, making sure your investments are suitable for you is a large part of a broker’s responsibility. Considerations as to the suitability of a structured product generally include: The volatility of the underlying asset; Tax implications based on structured products being considered “contingent payment debt instruments” by the IRS; Limits or caps on the product’s pay-outs; Accurately assessing the price of the product; Lack of an established trading market for structured products; and Loss of principal. Because structured products are so customizable, the specific risks associated with a specific structured product investment may vary. Tip #3: Ask About Their Experience with FINRA Arbitration and Mediation Many brokerage firms require investors to agree to arbitration when they open a brokerage account. While similar to court proceedings, arbitration is somewhat different and requires its own set of skills. At our firm, for example, Robert Wayne Pearce has handled arbitration and mediation before many regulatory authorities, including the Securities and Exchange Commission. In summary, the best investment lawyers will be those with experience in the specific types of proceedings relevant to your case. Tip #4: Ask Them About Their Familiarity with FINRA Rules and Broker Responsibilities The Financial Industry Regulatory Authority (FINRA), administers the set of rules that bind brokers and protect investors. Understanding these rules is just as important for investment lawyers as for brokers. Only with a deep understanding of the FINRA rules can a lawyer provide the most thorough representation to protect your rights. For example, FINRA rules prohibit brokers from “selling away,” a term for selling securities not offered by their brokerage firm. Unfortunately, brokers sometimes offer unapproved securities to their clients. With structured products, the risk can be especially high. Additionally, keep in mind that not all broker violations are obvious. Every investor’s situation is slightly different, and the way in which a broker might harm an investor is highly dependent on the facts of each case. Accordingly, you can’t go wrong by having a lawyer with experience who has handled structured investment loss claims before. Tip #4: Assess Whether You Get Along with Them An often-overlooked part of hiring legal counsel is whether you actually like your lawyer. While there’s nothing wrong with hiring an attorney based on their pedigree, it’s important not to forget that your attorney should also be someone you can work with. As with any other professional service, you shouldn’t have to put up with an attorney you dislike, especially if your case will last a long time. When you’re looking for an investment lawyer, figure out what kind of lawyer you’d like: do you prefer someone who doesn’t bother you unless there’s a major development, or would you rather be kept in the loop with more frequent updates? Do you value a friendly “bedside manner,” or are you ok with stricter professionalism? Tip #5: Ask Them About Previous Experience Handling Similar Cases Structured investment product claims may involve unique or complex issues. An attorney with previous experience handling such claims will be much better equipped to help you recover losses if possible. Tip #6: Find Out Their Track Record of Obtaining Settlements Investment lawyers typically include information about their past settlement awards directly on their website. If they don’t, it’s something you can ask about during your initial consultation. The best structured product investment lawyer will be one with a proven track record of winning cases for clients. Tip #7: Confirm Their Reputation Within the Legal Community As members of a profession with a high ethical standard, a lawyer’s reputation is hugely important. Whatever the size of the firm, it can be useful to vet their reputation like you would with another personal service. State and local bar associations and personal recommendations are a good way to evaluate any attorney. You can also check resources like the Martindale-Hubbell peer rating program, which ranks attorneys based on peer ratings and client reviews. Ready to Hire an Investment Lawyer? The Law Offices of Robert Wayne Pearce, P.A. is a Martindale-Hubbell AV Preeminent rated firm with more than 40 years of experience representing investors and brokers. If you lost money through a structured...

Continue Reading

FINRA Know Your Customer Rule and Investment Suitability—How Does it Apply to You?

FINRA regulates the conduct of brokers in the securities industry to protect investors from suffering losses due to financial advisor misconduct. The agency formulates rules to outline the behavior expected of broker-dealers and financial advisors when dealing with their investment clients. Nevertheless, FINRA receives thousands of customer complaints every year alleging violations of FINRA Rules. FINRA Rule 2090, the Know Your Customer (KYC) rule, and FINRA Rule 2111, the suitability rule, mandate minimum knowledge requirements for brokers when making investment recommendations and commonly appear in these customer complaints.  If you suffered investment losses due to unsuitable investment recommendations, The Law Offices of Robert Wayne Pearce, P.A., can help you determine if your broker violated one of these rules. Contact our office today for a free consultation. FINRA Rule 2090: Know Your Customer Rule FINRA Rule 2090, or the Know Your Client rule, requires financial advisors to know the “essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer” when opening and maintaining a client investment account. The “essential facts” described in the rule include details that are required to: Service the account effectively; Satisfy any special handling instructions for the account; Understand the authority of anyone acting on the customer’s behalf; and Comply with applicable laws, regulations, and rules. The KYC rule protects clients from investment losses by requiring their financial advisor to learn detailed information about their personal financial circumstances. The rule protects financial advisors by outlining the essential information about customers at the outset of the relationship, prior to any recommendations. Additionally, the financial adviser receives notification of any third parties authorized to act on the customer’s behalf. The Know Your Client rule acts in tandem with the suitability rule, FINRA Rule 2111. The information learned by financial advisors through the KYC requirement factors into the analysis of whether an investment recommendation is suitable.  FINRA Rule 2111: Suitability Alleged violation of investment suitability requirements resulted in 1,220 customer complaints filed with FINRA in 2020 alone, down from 1,580 complaints in 2019. The suitability rule requires financial advisors to have a “reasonable basis” to believe that a recommended transaction or investment strategy is suitable for the customer. A financial advisor determines the suitability of a transaction or investment strategy through ascertaining the customer’s investment profile. Factors involved in a suitability analysis include the customer’s: Age, Investment experience, Financial situation, Tax status, Investment goals, Investment time horizon, Liquidity needs, and Risk tolerance. Numerous cases interpret the FINRA suitability rule as requiring financial advisors to make recommendations that are in the best interest of their customers. FINRA outlines situation where financial advisors have violated the suitability rule by placing their interests above the interests of their client, including: A broker who recommends one product over another to receive larger commissions; Financial advisors who recommend that clients use margin to purchase a larger number of securities to increase commissions; and Brokers who recommend speculative securities with high commissions because of pressure from their firm to sell the securities. Any indication that a financial advisor has placed his or her interests ahead of the client’s interest can support a claim for a violation of the suitability rule. Rule 2111 consists of three primary obligations: (1) reasonable basis suitability, (2) customer-specific suitability, and (3) quantitative suitability. Reasonable Basis Suitability Reasonable basis suitability requires a financial advisor to have a reasonable basis to believe, based on reasonable diligence, that a recommendation is suitable for the public at large. A financial advisor’s reasonable diligence should provide him or her with an understanding of risks and rewards associated with the recommended investment or strategy. A failure to comprehend the risks and rewards associated with a particular investment prior to recommending the investment to a client can result in allegations of misrepresentation or fraud. If a broker fails to perform reasonable diligence regarding either component, the financial advisor violates this obligation. Customer-Specific Suitability Customer-specific suitability involves considering the specific details about an individual customer to determine if a transaction or investment strategy is suitable. The financial advisor reviews the details outlined above to determine the suitability of a particular transaction or strategy for each customer. Quantitative Suitability The quantitative suitability element requires financial advisors to recommend transactions that are suitable when viewed as a whole, not only when viewed in isolation. This element aims to prevent financial advisors from making excessive trades in a client’s account solely for the purpose of generating commission fees. Factors such as turnover rate, cost-equity ratio, and use of in-and-out trading indicate that the quantitative suitability obligation was violated. What Constitutes “Reasonable Diligence”  FINRA’s suitability rule requires brokers to exercise “reasonable diligence” in attempting to obtain customer-specific information. The reasonableness of a financial advisor’s effort to obtain such information will depend on the facts and circumstances of each investment relationship. A financial advisor typically relies on the responses provided by the customer in compiling information relevant to the customer’s investment profile. Some situations may prevent a broker from relying exclusively on a customer’s responses, including times when: A financial advisor poses misleading or confusing questions to a degree that the information-gathering process is tainted; The customer exhibits clear signs of diminished capacity; or Red flags exist that indicate the information may be inaccurate. Additionally, the suitability rule requires brokers to consider any other information provided by the customer in connection with investment recommendations.  Hiring an Investment Loss Attorney Violation of FINRA Rules 2090 and 2111 result in significant financial losses for investors every year. If you suffered losses because of unsuitable investment recommendations, you have the right to seek compensation from the parties responsible for your losses.  Cases against brokers and registered investment advisors can be complex for attorneys without experience in securities law.  Robert Wayne Pearce has over 40 years of experience representing investors in disputes against financial advisors and broker dealers. Mr. Pearce has tried, arbitrated, and mediated hundreds of investment-related disputes involving complex securities and FINRA rule violations. In fact, Mr. Pearce serves...

Continue Reading

The Most Common Examples of Breach of Fiduciary Duty (And What to Do)

Breaches of fiduciary duty are unfortunately common. Since the fiduciary duty is the highest legal standard of care, however, there are severe consequences for a breach of fiduciary duty. With the help of an investment loss recovery attorney, you can hold the fiduciary accountable for his or her misconduct. What Constitutes a Breach of Fiduciary Duty? A fiduciary duty is a responsibility to act in the best interests of investors as advisors or brokers. When a client’s principal fails to act responsibly in his or her best interests, he or she has committed a breach of fiduciary duty. Investment loss? Let’s talk. or, give us a ring at 561-338-0037. If you believe you are dealing with investment loss due to a breach in fiduciary duty, you should strongly consider hiring an investment loss attorney. The quicker you reach out, the quicker you can begin the process of recovery. The Law Offices of Robert Wayne Pearce, P.A., offers free consultations. Give us a call at 561-556-2927. Let’s discuss your case and see what we can do to help you get the compensation you need and deserve. The Four Elements of a Valid Breach of Fiduciary Duty Claim A breach of fiduciary duty occurs when the fiduciary fails to act in the best interest of the principal. This can happen through an intentional act or failure to act.  There are four elements to a valid breach of fiduciary duty claim. Duty A fiduciary relationship must exist for the fiduciary to owe a duty. You must show that the fiduciary knowingly accepted that role to hold them to the fiduciary standard of care. This is typically shown through a written agreement between the parties, such as a customer agreement. Breach The fiduciary must act contrary to your best interests. A breach of fiduciary duty can be shown through deliberate acts, such as making decisions on your behalf without consent. You can also prove a breach through the fiduciary’s failure to act—for example, not disclosing a conflict of interest.  Damages You must suffer actual harm or damages from the fiduciary’s breach. Proving there was a breach is not enough for a valid claim of breach of fiduciary duty. Damages can be either economic or non-economic, such as mental anguish.  Causation There must be a direct causal link between the fiduciary’s breach and harm to you. Despite your damages, if they are unrelated to the fiduciary’s misconduct or an unforeseeable result of the breach, you cannot recover your losses.  What Is a Fiduciary Duty? A fiduciary is a person entrusted to act in the best interests of another (i.e. the principal). Once the fiduciary agrees to the relationship, the fiduciary is bound by a set of legal and ethical obligations, known as fiduciary duties.  In general, all fiduciaries owe a duty of loyalty and a duty of care. Some fiduciaries will owe additional duties based on the relationship and the industry in which they are in.  The duty of loyalty requires fiduciaries to act in the best interest of the principa, avoid any conflicts of interest, and refrain from self-dealing. The duty of care means the fiduciary must make informed decisions based on all information available.  Fiduciary Duties of Financial Advisors  While all financial advisors have a duty of care to their clients, only registered advisors have a fiduciary duty. It is important to know whether your financial advisor is registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulating agency. Financial advisors who are not registered can make investments that benefit them, as long as the investment is within your stated objectives. A registered financial advisor, on the other hand, can invest only if it is in your best interest. For registered financial advisors, the fiduciary duties owed vary by state. However, the following fiduciary duties apply to all registered financial advisors in all states Duty to Recommend Suitable Investments Prior to recommending an investment, the financial advisor must study and understand the investor’s objectives, tax status, and financial situation, among other things. Any investments that the financial advisor recommends must be suitable to the investor’s needs.  Duty to Inform Investor A financial advisor must fully inform the investor of the risks associated with the purchase or sale of a security. The advisor cannot misrepresent any material facts regarding the transaction. Duty to Act Promptly and with Authorization  All client orders must be performed promptly and with investor’s express consent. The advisor must obtain separate authorization for each investment unless the investor has a discretionary account.  Duty to Refrain from Self-Dealing  A financial advisor cannot initiate a transaction where he or she personally benefits. Duty to Avoid Conflicts of Interest For any recommendations made after June 30, 2020, financial advisors have a fiduciary duty to avoid any conflicts of interest. If unavoidable, the advisor must disclose the conflict to the investor.  What Are Common Forms of Breach of Fiduciary Duty? Below are just a few examples of how a financial advisor can breach his or her fiduciary duty. In each instance, the fiduciary fails to act in the best interest of the investor. Misrepresentation or Failure to Disclose Information If a financial advisor does not present a client with all material information about an investment, this is a breach of fiduciary duty. Material information is what a reasonable investor would consider important when deciding whether to invest.  Sometimes financial advisors will mislead investors by omitting information, such as risk factors or any negative information about a stock.  Excessive Trading Excessive trading, also known as churning, in your account is a breach of fiduciary duty. Financial advisors will make large numbers of trades solely to generate more commissions for themselves.  Unsuitable Investments Financial advisors must “know their customer” before making investment recommendations. This includes understanding the client’s investment objectives, risk tolerance, time horizon, financial standing, and tax status. The advisor breaches their fiduciary duty if they make an unsuitable investment, even with the best intentions.  Failure to Diversify Your financial advisor must recommend a mix of investments...

Continue Reading

How to Respond to a CFTC Subpoena

Receiving a subpoena from the CFTC (U.S. Commodity Futures Trading Commission) is often met with panic by anybody who receives one. The recipient will usually have no advanced notice of the subpoena, other than a letter from the CFTC stating that he or she should produce documents related to a specific time period. The recipient may be scared of what will happen if they do not comply with the subpoena, but in fact there are several ways to proceed after receiving a CFTC subpoena. The first thing to note is that all subpoenas issued by the CFTC are civil subpoenas. In other words, they are issued to an individual or business that may or may not be accused of a violation of the Commodity Exchange Act or any CFTC rules and regulations in a civil proceeding. But aware of the fact that the CFTC can share whatever documents or information it gathers with criminal prosecutors and other agencies. What is a CFTC Subpoena? A CFTC subpoena is a document issued by the Commodity Futures Trading Commission (CFTC) that requires a person or entity to provide information or documents to the CFTC. The subpoena is a formal order from the court to produce documents, data, or both. Need Legal Help? Let’s talk. or, give us a ring at 561-338-0037. IMPORTANT: The CFTC will not inform you whether you are a target, subject, or witness. In fact, the CFTC attorneys and investigators will tell you nothing about the investigation! This is why the first thing you should do if you receive a subpoena from the CFTC is contact an experienced CFTC defense attorney. A lawyer can help you decide how you are going to respond to the subpoena. Although there are several ways to proceed, a lawyer can recommend the best course of action based on your specific circumstances and reduce your chances of making a procedural misstep that will result in a more aggressive investigation by the CFTC or worse. CFTC Enforcement Actions If you do not produce the documents, or if you fail to comply in another way outlined by the subpoena, then you could be facing an enforcement action. The usual course of an enforcement action is for the CFTC prosecuting attorneys to file a complaint with the federal district court where your business is located. What happens next could include the filing of a complaint with the federal district court where you or your business is located. The filing will contain a proposed order for the court to enter. The order will direct you to produce specific documents and information, and inform you if you do not comply with the order you may be held in contempt of court and put in jail until you comply. If you receive a subpoena from the CFTC, be sure to contact an experienced lawyer right away! CFTC’s Information Gathering Process As a general matter, it is important to know that the CFTC has very broad powers when it comes to investigating suspected violations of the Commodity Exchange Act. Specifically, the CFTC can issue subpoenas to a person or entity for any records related to its investigation. The compelled production must be made within the date stated on the subpoena. The CFTC can be quite aggressive in investigating suspected violations of the Commodity Exchange Act. This investigation can include issuing subpoenas for documents and testimony as noted, as well as using the depositions of those who appear or testify before them in court. They may also issue subpoena duces tecum orders to require production of books, records, papers and other data that they believe might be relevant to their investigation. This means that anybody could be served with a subpoena if the CFTC believes that you have relevant information in your possession. The CFTC has very broad powers when it comes to enforcing subpoenas issued by them. For instance, they can issue a civil investigative demand to require an individual or entity produce for inspection and copying all records relating to any transactions or activities related to any agreements, contracts, or transactions in any commodity. The CFTC can also issue an administrative subpoena to require that someone appear before them to testify under oath about the production of documents and records. Do not assume that because you are only served with a subpoena for documents, that this is all you have to worry about. You may be subject to a deposition or some other form of testimony at some point during the investigation. It is important to know that, as an individual or entity being investigated by the CFTC , you have a right to counsel present at any hearings on enforcement matters. Steps to Take When Receiving a CFTC Subpoena When you receive an administrative subpoena issued by the CFTC, it is important to take certain steps that can greatly reduce your risk. These include: Preserve all documents and gather supporting evidence. All staff that need to know must be notified (in-house counsel and certain officers) and a litigation hold must be issued. Consult with an experienced CFTC defense lawyer immediately. Examine any potential legal responsibility under the relevant laws and regulations. The Formal Order of Investigation should be obtained by your attorney. If your attorney thinks it’s necessary, he or she may want to speak with the CFTC’s Staff about limiting the subpoena’s scope where appropriate. If you’re not sure whether an internal investigation is required, consult with your lawyer. Review all collected documents for responsiveness, privilege and confidentiality Consider whether any particular employee requires independent legal counsel if you are unsure. Your CFTC defense lawyer can help you with this. Determine whether there are any objections to the scope or burden of the subpoena, as well as whether to fight the subpoena (by motion to quash) or comply. If the subpoena recipient is a corporation, see if public disclosure is required. Given the complexity and number of necessary action steps involved with responding to a CFTC subpoena, individuals and firms without experienced legal representation...

Continue Reading