Avoiding Common Investor Problems
he National Association of Securities Dealers (NASD) has published helpful guidance for investors on its website,
www.nasd.com,
entitled, "Common Investor Problems and How to Avoid Them." These "Investors' Best Practices" describe what investors can do to avoid the four most frequently reported problems: misrepresentation, cold-calling, unsuitability and unauthorized trading. Let's examine the regulator's advice.
Misrepresentations (and Omissions)
Brokers may not tell the whole story in describing an investment, omitting or misrepresenting material facts. The NASD cautions that this misconduct commonly is found with low-priced, speculative securities because of their increased risk.
Investors may be able to detect this problem, according to the NASD, when they lose money on the investment, when they have trouble selling the investment, when they are able to conduct independent research, or when they review written information such as a prospectus. To avoid the problem, the NASD advises that investors request that their broker send written information to substantiate his or her remarks. Also, investors should maintain contemporaneous notes of their conversations with the broker.
Cold-Calls
Cold-calls, or high pressure sales calls, are designed to harass investors into purchasing investments. The NASD states that investors can detect cold-calling when, for example, the broker claims that a fast investment is necessary to avoid missing the opportunity, or even to take advantage of "inside information."
To avoid this problem, investors should beware of sales pitches that make exaggerated claims, and should never send money to a broker or brokerage firm that they do not know. The NASD advises investors to visit the broker and the firm, if possible, and to inquire from the NASD as to the broker's background by calling 800-289-9999 or visiting the NASD's website.
Suitability
Brokers cannot recommend investments to investors unless they are suitable for the investor, given such factors as the investor's age, financial status, goals, income needs and net worth. As an example, the NASD cites a recommendation to make a significant investment in a highly speculative security to an investor who needs income.
Investors may not be able to detect an unsuitable investment until after they have lost money or another financial professional has alerted them to the problem.
To avoid the problem of unsuitable investments, the NASD suggests that investors ask to review the brokerage firm's account file, such as the new account form with profiles for the investor's investment objectives and risk tolerance. Additionally, investors should attempt to be proactive, by asking such questions as, "What is the risk of losing money on this investment?" Investors should maintain contemporaneous notes of their conversations.
Unauthorized Trading
This misconduct involves the broker's buying or selling a security without the investor's prior knowledge and prior consent to doing so. Investors can detect this problem by carefully and promptly reviewing their confirmations of trades as well as their monthly account statements.
The NASD advises investors to avoid this problem by immediately complaining, preferably in writing, to the broker's branch office manager. Then follow up with communication to the firm's compliance department. Act immediately as time is critical.
Regarding all types of broker misconduct, the NASD suggests that investors attempt to resolve their conflict with the brokerage firm. That may or may not work, and investors should be mindful of delays that may ensue. In fact, most often, investor complaints are met with "Delay, Delay and Deny". Should investors not be satisfied with the firm's response to a complaint, the NASD recommends filing an arbitration claim.
_______________________________________________________________________
James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
|
Download Acrobat Reader