September 12, 2017
What happens when a stockbroker services the account of a customer whose behavior seems alarming? It's an interesting question. Sometimes what "alarms" a stockbroker is a customer's independence, which may be prompted by an understandable desire to avoid buying in-house products with front-end fees or hefty management charges. On the other hand, sometimes a stockbroker sees a client out of control and engaging in unsound financial decisions. It is a ticklish problem as to when and where to draw the line between respecting a customer's refusal to follow a stockbroker's advice and insisting that the advice be followed or the customer take her business elsewhere. When that line drawing isn't done on a timely basis or at all, the result may often be a lawsuit. Consider today's BrokeAndBroker.com Blog analysis of a recent FINRA arbitration.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2016, public customer Claimant Krause alleged breach of fiduciary duty; gross negligence; negligence; negligent misrepresentations and omissions; unsuitability; failure to supervise; and violations of FINRA Rule 2010 in connection with what the FINRA Arbitration Decision characterizes as "investments in international equities and emerging markets." Claimant sought at least $228,000 in compensatory damages plus costs, fees, and interest. In the Matter of the FINRA Arbitration Between Thomas E. Krause, Individually and on behalf of his Individual Retirement Account, Claimant, vs. RBC Dain Rauscher, n/k/a RBC Capital Markets, LLC, Respondent (FINRA Arbitration 16-00902, August 28, 2017).
Respondent RBC generally denied the allegations and asserted various affirmative defenses. Respondent also sought the expungement of the matter from the Central Registration Depository records of a non-party, whose name was disclosed in the FINRA Arbitration Decision but whose name is redacted in this article at the sole discretion of the BrokeAndBroker.com Blog.
In April 2017, the Claimant notified FINRA that the arbitration had been settled and Respondent sought a hearing on the expungement request. In August 2017, the FINRA Arbitration Panel conducted an expungement hearing at which Claimant did not participate or contest the requested relief. The Panel concluded that the Non Party was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; and that Claimant's claim, allegation, or information is false. In reaching its decision, the arbitrators provided the following rationale [Ed.: The BrokeAndBroker.com Blog has redacted the name of the Non-Party as noted below:
1. The Panel found that Non-Party [REDACTED] was not the original broker at the time the account was opened. In November of 2010, Non-Party [REDACTED] took over the account from his father, who unfortunately passed away. Once Non-Party [REDACTED] took over the account, Claimant refused several attempts by Non-Party [REDACTED] or his associate, to schedule an in-person meeting. Once Non-Party [REDACTED] became alarmed by the withdrawal history of Claimant, a meeting occurred, where it was decided to place Claimant in a Prime Income Fund ("PIF"). While Claimant's investment funds were in the PIF, the account increased approximately $25,000.00. As such, the Panel found that Claimant's account did not lose money during the relevant time period that Non-Party [REDACTED] was the broker.
Bill Singer's Comment
Online FINRA BrokerCheck records as of September 12, 2017, disclose that the Claimant settled on March 17, 2017, for $50,000 to which he Non-Party did not contribute.
Compliments to this FINRA Arbitration Panel for a thoughtful rationale that fully exonerates the Non-Party.
There are two important takeaways from this case-- one for stockbrokers and one for public investors.
Stockbrokers should note that if you become "alarmed" by any conduct by a customer, you should memorialize your efforts to communicate your concerns to the customer. Once you memorialize your alarm, however, you no longer have the luxury of sitting back and letting the customer commit economic suicide. Confronted with a non-compliant customer, a stockbroker might need to "fire" the customer and allow your firm to either reassign coverage of the account or inform the customer to transfer the account to another firm. If you inherit an account, you should immediately review past practices and communicate to your new customer whether you concur or disagree with maintaining the course. If you find that your customer rejects your advice, make sure to communicate such an impasse to your manager and to reach a professionally appropriate status in terms of continuing to handle or reject the account. Obviously, you always need to be mindful that your comments to the customer do not improperly defame the predecessor stockbroker. Similarly, customers have every right to consider and reject your advice. That being said, there is a line that gets crossed when a customer's conduct raises issues of "suitability" and "know your customer." Wall Street's compliance departments and regulators are not sympathetic to stockbrokers who argue that they clearly and unequivocally expressed their "alarm" to a customer but, nonetheless, sort of threw up their hands in frustration and continued to follow the misguided instructions and decisions of the customer.
Customers should note that industry respondents/defendants will often defend against lawsuits by asserting that they had warned against the very conduct that resulted in losses. It is advisable for most customers to give extra weight and consideration to any warnings from a servicing stockbroker against specific investment conduct. Many stockbrokers are professionals and have your best interests at heart. On the other hand, let's be realistic, there are lots of hacks among the ranks of stockbrokers and simply because they urge you to sell this or buy that doesn't mean that there is any motivation behind such advice beyond generating more fees and commissions. If you are continually experiencing push-back from your stockbroker, you owe it to yourself and that individual to make a decision as to whether to stay the course or pursue an amicable parting of the ways. Keep in mind that in the securities industry we have a practice referred to as an "Activity Letter" or a "Happiness Letter" whereby the brokerage firm will seek your assent to the nature of transactions in your account and confirm that you are aware of same and confirm your acceptance. Should you read such missives haphazardly or not at all, you may compromise your ability to recover losses down the road. In legal terms, you may be viewed as having been "put on notice" of what you subsequently claim was unauthorized trading or unsuitable advice.