What must an investor prove to bring a claim in FINRA?

Share Markets Most legal disputes between investors and brokerage firms must be brought in arbitration before the Financial Industry Regulatory Authority, also known as FINRA.  Cases brought in arbitration differ greatly from cases brought in court.  Arbitration cases are not decided by judges or juries, but rather by a panel of three arbitrators.  Discovery, i.e., the ability to gather documents and learn facts from the other side, is much more limited in arbitration. Also, the losing party in arbitration has very limited rights to appeal an unfavorable ruling.

To prevail in an arbitration claim, an investor must generally prove some form of misconduct on the part of the brokerage firm or one of its brokers. FINRA cases usually involve one or more of the following types of legal claims:

Suitability Violations.  Under FINRA Rule 2111, brokers and brokerage firms cannot make investment recommendations to customers unless those recommendations are "suitable." Generally, this imposes three requirements on the broker. First, the broker must know the client. This means the broker must learn about the client's background, investing history, financial situation, investment risk tolerance and investment objectives.  Second, the broker must know the investment product that he or she is recommending to the client.  The broker must know the risk level and essential facts regarding the investment product being recommended, whether it is a stock, bond, or some other form of investment.  Third, the broker must match the investment recommendation to the client, such that the recommendation is suitable for the client based upon the client's particular facts and circumstances. 

Misrepresentations and Fraud. Brokers must tell the truth about investment recommendations and disclose all material facts affecting an investment recommendation. Failure to do so gives rise to a legal claim.

Unauthorized Trading.  In most brokerage accounts, a broker must secure the client's express permission before buying or selling any position in the account. When a broker buys and sells without first securing a client's permission, this is unauthorized trading.

Churning.  Many brokerage firms charge clients a commission for each and every trade.  This provides brokers with a financial incentive to place more trades. The more trades the broker places, the more money he or she makes.  When a broker recommends trades in order to generate more commissions, rather than to pursue a legitimate investment strategy, this is called churning.

Breach of Fiduciary Duty .  As a general rule, a broker owes a fiduciary duty to act in the client's best interests rather than in his or her own best interest.  A broker violates this fiduciary duty by recommending unsuitable investments, making misrepresentations, engaging in unauthorized trading and churning the account.

Please Note:  McCabe Rabin, P.A. provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice.  If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.