Financial advisors are supposed to make sure that the investments that they recommend are suitable for a particular client. They should conduct due diligence on a company before making a recommendation. However, some brokerage firms fail to conduct due diligence or do not understand the risks and prospects of a particular company. In some cases, brokers have recommended oil and gas investments, assuming prices would go up, even though oil and gas investments are particularly risky. If you were harmed by violations of federal securities laws, state blue-sky laws, or consumer protection laws, you may be able to bring a claim against a brokerage firm with the assistance of a broker fraud attorney. Common causes of action include negligence, fraud, breach of contract, unsuitable trading, churning, and breach of fiduciary duty. Our securities oil and gas FINRA arbitration lawyers represent clients in lawsuit and arbitration proceedings nationwide.Establishing the Liability of Brokerage Firms
Under the Securities Exchange Act of 1934, a broker arranger securities transactions for others. Brokers must register with the Securities and Exchange Commission (SEC) and abide by certain FINRA regulations. Failing to abide by these regulations may result in a claim or lawsuit against an individual broker or a brokerage firm.
Brokerage firms are one of the primary ways through which investments are made, and their function is to execute trades for investors. There are full-service brokerages as well as discount brokerages. They make their profits through various revenue streams, including investment banking spreads and markups, commissions and wealth management fees, and retail customer accounts.
Charging a commission on trades and collection fees from investors allows some brokerage to turn a profit. The amount charged can be significantly different depending whether an investor is using a full-service or discount brokerage. At full-service brokerage firms, the brokers are supposed to work with a client to develop an investment strategy and create and maintain a portfolio that follows the strategy.
FINRA has suitability rules that require a broker to use due diligence and to make appropriate recommendations based o financial conditions, investment objectives, and risk tolerance. Brokers must know their customers. A violation of these rules may be the basis for an independent negligence action or a breach of contract lawsuit. Brokers are prohibited from recommending investments that are unsuitable.
When a full-service broker make numerous unnecessary trades for the purpose of generating commissions, this is called churning, which is actionable. One sign of churning is an account that is declining in value even though the market is moving up, or an account that is underperforming relative to the marhet. Large losses are sometimes a sign of excessive trading.
Another way that brokers make money is by using markups. With markups, a broker will purchase a bond at a low price and resell it to another customer at a higher price. The broker profits from the spread, the difference in price between the low price and the resale price.
Margin accounts are another source of profits for brokerage firms. With these accounts, a client uses equity in her account as collateral to secure a loan from the brokerage firm to buy up to double the cash balance in the account. The client invests with the broker's money rather than her own money and can make double the broker's gain or lose twice as much. The brokerage firm charges interest for as long as the loan is outstanding. If the equity falls too low in comparison to a maintenance margin, the firm makes a margin call. In response to this, the investor must deposit more funds or sell stock to offset the difference between the price of the security and the maintenance margin. Since the firm can increase the minimum amount required and sell securities without notice, the investor has the potential to lose more than what she deposited.Explore Your Options with an Oil and Gas FINRA Arbitration Lawyer
Brokerage firms owe significant duties to their clients, but they sometimes violate those duties in their desire to turn a profit. Our oil and gas FINRA arbitration attorneys have represented investors throughout the U.S. in claims against brokerage firms in arbitration and in state and federal courts. Contact us at (800) 975-4345 or through our online form to set up an appointment to discuss your situation.