Employment Issues: Preventative Medicine for the Retail Broker

Arbitration is painful; the practices outlined below are arb "aspirin."

Let's face it, few people enter a business relationship thinking it will go south. But when it happens in the brokerage industry, the experience can be particularly jarring, as advisors find themselves at an arbitration table facing clients who once sang their praises.

The best way to prepare oneself for a business calamity is to have procedures for staying squeaky clean. First a word about arbitration: Despite its connotations, arbitration is not a voluntary meeting between two parties in a brokerage disagreement. Rather it is a forced forum for dispute resolution against brokerage firms and their employees, meaning that attendance is mandatory. Further, arbitrations are not a court of law. Instead of having a matter decided by a judge with extensive legal training, a broker's fate is in the hands of three regular people, two of whom are unfamiliar with broker/dealer compliance issues.

Attending an NASD hearing as a respondent is like sitting in a dentist's chair. Attorneys for the broker's clients typically demonize the broker with allegations they expect will resonate with the arbitrators: unauthorized trading, churning and unsuitability are three favorites.

However, a broker can take specific actions to minimize the likelihood of facing an arbitration panel in the first place.

Document/Record Keeping

The most important document in a suitability/churning arbitration is the New Account Form. It is the official record of your customer's profile. It is therefore imperative that the document is complete.

  • Make sure the client signs the form to avoid allegations that the information is inaccurate.

  • Regularly update the form with any changes, including who is authorized to conduct business in the account.

  • Be certain that the “customer” on the form is the person who requests trades and other activity in the account. There are countless examples of unauthorized trading claims in which a spouse who is not listed in paperwork is nonetheless allowed to conduct trades and portfolio adjustments.

  • Get in the habit of taking contemporaneous, dated notes of substantive telephone conversations. The notes should be recorded either on the back of a posting page or in a composition notebook where pages are not easily removed. If you recommend an action (the sale of a losing position that continues to slide, for instance), the written, dated record of your recommendation can go a long way toward minimizing or eliminating damage claims.

  • Send emails or faxes to confirm each trade, and retain copies of all correspondence, including printed copies of all letters, emails and faxes, with the confirmation that the fax was sent.

  • Oral is not enough. You must create written communications to avoid misunderstandings, and, further, such correspondence comes in handy when a portfolio takes a beating.

Don't Hide the Weenie

Which brings up another good point: Bad news can't wait. Provide it immediately to your clients. Do not let them learn of it from other sources. When things are bad, clients need handholding, advice and guidance. If clients are losing money and begin to lose faith in your competency and conscientiousness, they start thinking about suing.

Get clients to sign and acknowledge account activity on a regular basis — particularly trades that are not in keeping with stated objectives. Signatures are easier to obtain, of course, when the account is profitable, but efforts should be made even when things are going badly.

There is no perfect, ironclad system to prevent a negative arbitration outcome. However, having represented hundreds of brokers in securities arbitrations, I am more confident with the broker who keeps records, maintains notes of client conversations and, most important, has activity letters in which the client approves of transactions and of the broker's execution of those transactions.

The NASD/NYSE arbitration arena is ugly and expensive. Avoid it by not taking shortcuts in your daily affairs.

Writer's BIO:
Richard Roth
is founder of The Roth Law Firm, which specializes in securities law. His firm has successfully defended broker/dealers in hundreds of customer-related securities arbitrations. [email protected]

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