How Safe Is Your Brokerage Account in the United States?

Central and South American investors often open brokerage accounts in the United States because of political and economic instability in their home countries.

But if you are considering investing in the United States, you should be aware of the significant risk of stockbroker misconduct. You should understand the role of a broker and the different types of broker misconduct.

Duties Brokers Owe to Investors

Brokers owe certain duties to customers, which include:

  • recommending only investments that are suitable;
  • acting in the customer's best interests and putting those interests ahead of their own;
  • informing the customer of all material facts about recommended investments, including the risks;
  • not misrepresenting any material fact about an investment; and
  • transacting business only after obtaining prior authorization.

If a broker breaches these duties there can be devastating financial consequences. Many brokers are honest, well-qualified, and trusted professional advisors. However, some brokers engage in improper conduct.

Improper conduct includes making unsuitable investment recommendations, churning or excessive trading, misrepresentations and omissions, and unauthorized trading.

Types of Broker Misconduct

Unsuitable Investment Recommendations

A broker must understand a particular customer's "investor profile" prior to making an investment recommendation and must make only those recommendations that are consistent with that profile. The profile includes the customer's age, income, net worth, tax status, investment experience, risk tolerance, and investment objectives.

An unsuitable investment recommendation, for example, might be a recommendation of volatile, risky stocks to an elderly or conservative investor rather than conservative interest-paying bonds, such that the investor's money is at risk of being depleted to the point where the customer can no longer meet living expenses.


This is also known as excessive trading. One red flag for churning or excessive trading is when a broker buys and sells securities repeatedly in a short period of time, without regard for the customer's best interests.

Since the broker often generates commissions per trade, he or she has engaged in improper self-dealing and makes it very difficult for the customer ever to realize a profit.

Misrepresentations and Omissions

Brokers are obligated to disclose (and not omit) all material facts about recommended investments. A material fact is one the investor would consider important in making an investment decision. Misrepresentations and omissions frequently concern the lack of disclosure or improper disclosure of the risk of making a certain investment.

Unauthorized Trading

A broker must obtain the customer's prior approval before making a trade. Even with prior approval and written discretionary trading authority, the broker still must invest assets consistently with the customer's investor profile. Investors can bring a claim to recover losses resulting from unauthorized trades.

Take Steps to Protect Your Money

Central and South American investors should take the following steps to avoid becoming a victim of stockbroker misconduct, including:

  • Monitor account holdings: Review your monthly account statement when it is delivered to you or review your account online. Do not rely on unofficial or informal account summaries from the broker. Do not rely on a broker's statement that your investments are "doing fine."
  • Unauthorized trading: Immediately address unauthorized trades with the branch manager or broker's supervisor. Demand that the unauthorized trade be reversed and do not delay in making this demand.
  • Improper asset allocation or over-concentration: Compare your account holdings (bonds, stocks, mutual funds) with the stated investment objectives. Your goals may not line up with where your assets are actually invested.
  • Churning or excessive trading: If you pay commissions, be wary of a broker that sells securities within days or weeks of purchase.
  • "Happiness" letters: Brokerage firms conduct internal audits that lead to the discovery of questionable trading. The firm may send a "happiness" letter stating the possibility of inconsistent investment activity or misconduct, and to call if you have questions. Recognize this letter for what it is -- a warning sign that there may have been stockbroker misconduct -- and begin investigating right away.

Contact an experienced securities arbitration attorney if you suspect stockbroker fraud or stockbroker misconduct. Most lawyer consultations are free and will help you to determine if you have a valid claim to recover your investment losses.

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