Resolving Disputes with Registered Individuals and Firms
Most brokerage firms and investment advisers, and their securities agents or representatives (salespersons), deal honestly and fairly with their clients. Sometimes, however, difficulties and disputes can arise and, on rare occasions, fraud and theft may occur. There are several steps you can take to protect yourself.
The best way to avoid becoming a victim of securities fraud or theft is to arm yourself with knowledge. Before you invest, ask the salesperson if he or she is registered in Wisconsin and if the security being offered is qualified for sale in Wisconsin. You may check the responses, as well as the salesperson's registration status and disciplinary history, by calling the Wisconsin Division of Securities at (608) 266-2139 or (800) 47CHECK. You may also check the background of a brokerage firm's salesperson online via FINRA Broker Check at www.finra.org, or by calling the FINRA Broker Check Hotline at (800) 289-9999.
Do not let yourself be pressured by the salesperson into making an investment or purchase. You may need time to determine if a purchase is appropriate for you, as well as to verify the salesperson's statements. Do not fall for extravagant claims. Ask to see a copy of the prospectus which describes the security and the company issuing it. Protect yourself by investigating before you invest.
Aside from clerical errors, there are a number of potentially serious abuses which could occur in a securities account and of which you should be aware. Although you may not learn of these unlawful activities until after the fact, being able to recognize them and taking immediate action to rectify them should be your first priority.
When brought to the attention of regulatory authorities, any of the activities described below may result in disciplinary action against the salesperson or firm, including potentially a referral for criminal prosecution. Merely recommending investments that happen to lose money, however, is not a crime or a violation of the securities law. No one can predict or guarantee how a security will perform after its purchase. On the other hand, the promise of an unusually large return or guaranteed result may be a red flag.
All brokerage firms and their sales agents who conduct securities business with persons in Wisconsin must be registered with the Wisconsin Division of Securities. Investment advisers who are not registered with the SEC, and investment adviser representatives, must also be registered with the Division (unless subject to an exemption or exclusion). Selling securities without being registered is a serious violation of the securities law.
Every securities offering in Wisconsin must be registered with the Wisconsin Division of Securities, unless the offering qualifies for a specific exemption from the registration requirements such as the category identified as "federal covered securities." It is against the law to sell unregistered, non-exempt securities in Wisconsin. However, the fact that a security has been registered here does not mean that the Division has reviewed and approved its sale. Also, many fraud cases arise from securities which are exempt from registration, so they may be legally sold in Wisconsin without the Division knowing about the sales.
Unless the salesperson has written authority from you, you must approve each order to buy or sell before it is entered for your account. Without such authority, the salesperson must not buy or sell securities on your behalf and merely inform you later. There are exceptions such as a customer's failure to pay for purchases or to deliver certificates for securities that the customer has sold. Also, if you enter into a contract with an investment adviser and the contract gives the salesperson discretion to make investments on your behalf, then you have authorized any transactions made under the terms of the contract.
Salespersons are required to make investment recommendations to customers based on a reasonable inquiry into the customer's financial condition, investment objectives, and other relevant information. However, the salesperson can only assess suitability to the extent that you share sufficient information regarding your circumstances and objectives. Because not every customer can tolerate the same degree of investment risk, a given security may be appropriate for one customer, but not for another. It is important to give your adviser a reasonably complete picture of your financial situation for the adviser to give you the best advice.
Churning (Excessive Activity)
Churning is a pattern of securities trading in which the salesperson makes numerous purchases and sales of securities in order to generate commissions. To identify churning, calculations can be made to determine how many times the dollar value of the account was reinvested, how much commission income was generated for the firm and the salesperson, and what the customer would have to earn, taking those commissions into account, in order to break even or obtain a reasonable return.
Firms and their salespersons are required to execute customers' orders promptly, at prices reasonably related to the market at the time the order was received. Salespersons must not ignore your instructions to buy or sell or to seek a specific price in the market.
Failure to Deliver
Delivery of a customer's securities and uninvested funds must be made within a reasonable time of the customer's request.
Unauthorized Transfer of Assets
No funds or securities may be withdrawn from your account without your written authorization. Unauthorized transfers may be detected by closely reviewing your monthly statements to determine that all of your funds, securities, and transactions are accurately reported.
Fraud can take many forms. It often consists of the misrepresentation or omission of material facts in the offer and sale of securities. It could also be a type of business practice, such as trading on "inside" information, manipulating the market price of securities, or "selling away" (i.e., selling an investment product or security that is not approved for sale by the salesperson's firm).
Sometimes, out-and-out theft may take place. Never make checks payable to a salesperson; instead, make them payable only to the brokerage firm or the issuer of the security, such as a mutual fund. Never give cash or securities to a salesperson. Even if the firm is bonded for losses, it still may be difficult for you to prove that you did, in fact, give cash or securities to the salesperson.
Once you have invested, vigilance becomes your best protection. The most important step you can take to protect yourself is to review your purchase and sale confirmation slips and monthly statements as soon as you receive them. If you have a question, ask your salesperson for an explanation. If you find an error, request that it be corrected immediately. Early detection may prevent losses from mounting and will show that you do not agree with the actions that took place in your account. The initial contact may be by telephone or letter, but if a telephone is used, consider promptly following up with a letter in case proof of the conversation is needed later. Take written and dated notes of your conversations with the salesperson, as well as with anyone else at the firm, regarding the problem.
- Save all records of your transactions and copies of your correspondence with the salesperson and the firm. These papers can support your version of the facts if a dispute develops. If you send documents to your brokerage firm or salesperson, send only copies. NEVER part with an original document or letter; it is your most valuable piece of evidence.
- If the salesperson is unable or unwilling to resolve your concerns, send a written complaint to the branch manager or compliance department of the brokerage firm. The letter should include details of your concerns and copies of your monthly statements or other documents which help to explain the problem. Again, DO NOT send your originals. If you cannot resolve your problem with the firm, there are several alternatives you can explore.
The Wisconsin Division of Securities regulates the offer and sale of securities; it also registers and regulates brokerage firms, their salespersons (also called agents), and investment advisers. You may send a letter of complaint to the Division detailing your concerns. Be sure to enclose copies of your correspondence with the brokerage firm or investment adviser and copies of all related documents.
- The Division of Securities can take disciplinary action against brokerage firms and their salespersons, and investment advisers, who have violated the law. Although the Division cannot represent a customer in attempting to recover losses, resolution of disciplinary proceedings may also result in a firm's repurchase of securities from a customer or other types of reimbursement to a customer.
- Securities transactions with brokerage firms and their agents are governed not only by state law, but also by federal law. Federal securities law is administrated by the U.S. Securities and Exchange Commission. Related business-practice rules are administered by the Financial Industry Regulatory Authority, Inc. ("FINRA") which is a self-regulatory organization of member firms.
Some violations of the Wisconsin securities law, including most of those already discussed, provide grounds for civil lawsuits. Under the Wisconsin securities law, you have between one and five years from the date of the transaction to file a lawsuit depending on the nature of the violation. You can seek a full return of your invested money, interest on that amount at the statutory rate, and reasonable costs and attorney's fees from those who violated the law, including the brokerage firm, salesperson, investment adviser and any partner, officer, director, or employee who materially aided the transaction. Because other laws may also apply, you should probably seek legal advice before deciding to file a lawsuit and as soon as you become concerned.
Most customer agreements now have a provision requiring arbitration in the event of a dispute. Such a provision prevents the customer from pursuing a lawsuit, even for violations of the securities laws. If the customer agreement form presented to you contains a mandatory arbitration clause, you may ask that, as a condition of your doing business with the firm, such a clause be deleted from the agreement before you sign it. However, the firm is not obligated to remove the arbitration provision.
- Arbitration takes place outside the court system and is a less formal process than a court proceeding. It can be quicker and less expensive than going to court. As with court proceedings, although no lawyer is required, it is recommended that you seek legal advice.
- The arbitration process begins when you file a claim with an arbitration service. The filing consists of a completed Uniform Submission Agreement, a Statement of Claim, and the required fee. Check the rules of the arbitration service through which you are seeking arbitration to determine if any time limitations exist. In any case, the longer you wait, the more difficult if may be to prove your claim.
- Arbitration cases may be tried by a single arbitrator or a panel of three arbitrators. The size of the panel depends upon the dollar amount of the dispute and the arbitration service's rules. The panel is selected from the service's list of available arbitrators. They may include members of the industry as well as persons with no securities industry affiliation. In most cases, each party to the dispute will have some input into the selection process of arbitrators.
- Arbitration hearings can be held at most any location convenient to the parties, including the offices of the service, a law firm, or a hotel conference room. The rules governing procedures and evidence at an arbitration hearing are less formal. Both sides present evidence, and the hearings usually last a day or two unless the circumstances are more complex. The arbitrators usually have 30 business days to reach a decision. They need not give a reason for that decision, but may state simply who won and the amount of the award, unless the arbitration forum allows for the parties to request a more detailed written award.
- Although arbitration is generally faster than a court proceeding, in some cases the process can still take a year or longer. The decision of the arbitrators is final. There is no ability to have it reviewed by a court, except in exceptional cases of misconduct by the arbitrators such as fraud, evident partiality, corruption, or the manifest disregard of a clearly defined law. Because court review is unlikely and usually no reasons are given for the arbitrators' decision, parties on both sides of an arbitration proceeding take the chance they will lose and never know the reason.
The following organizations conduct securities arbitration hearings:
Financial Industry Regulatory Authority, Inc. ("FINRA")
American Arbitration Association ("AAA")
Chicago Board Options Exchange ("CBOE")
The organization having jurisdiction over your dispute is probably determined by the arbitration clause in your brokerage or investment advisory agreement. If that is not the case, you may choose an arbitration service yourself.
For brokerage disputes, FINRA also offers another option for resolving disputes prior to a formal arbitration hearing - mediation. In mediation, the parties discuss their problems and feelings in informal joint and private meetings with the mediator, usually an attorney with a securities background. The mediator has no power to dictate a solution or compromise but offers suggestions to help the parties find an acceptable resolution.
Unlike arbitration, mediation is not binding. If no agreement can be reached through mediation, you can still pursue arbitration or civil action. In fact, if you have already filed an arbitration claim but have not gotten to the hearing stage, you can request a delay pending mediation. Mediation also is typically more efficient and less expensive than arbitration.
Your first attempt to resolve any problem or concern with your account should be with the salesperson and the firm. DO NOT WAIT for a matter to correct itself. If a resolution is not forthcoming, do not hesitate to contact a regulatory authority such as the Division of Securities, and to seek legal advice.
You can file a complaint by writing to:
Department of Financial Institutions
Division of Securities
PO BOX 1768
Madison, WI 53701-1768
Following is a list of addresses for the Department of Financial Institutions and other agencies regulating brokerage firms, securities agents, and/or investment advisers:
Division of Securities
PO Box 1768
Madison WI 53701-1768
FINRA - Chicago District Office
55 West Monroe Street, Suite 2600
Chicago IL 60603
U.S. Securities and Exchange Commission
Chicago Regional Office
175 West Jackson Blvd, Suite 1450
Chicago IL 60604
Information and forms for arbitration can be obtained by contacting one of the following arbitration services:
FINRA Dispute Resolution
One Liberty Plaza, 27th Floor
New York NY 10006
American Arbitration Association
Chicago Regional Office
150 N. Michigan Ave., Suite 3050
Chicago IL 60601