Where To Turn When Your Broker Lets You Down

While Wall Street has tried to rebound from its doldrums of 2009-2000, the investing public - especially the "little guy" - has been presented with an extraordinary legislative package. Called the Securities Investor Protection Act, the law created a new government corporation - quickly acronymed SIPC by the Street - to guard the average investor against the failure of a brokerage firm. At least, it protected him up to £50,000 in losses of cash or securities if his broker went broke.

It did nothing, however, for the investor whose broker manages to stay solvent but does a shabby or even fraudulent job with the investor's resources. Today this is a bone of investor-broker contention. It is gnawed from time to time, but particularly in times like these, when the going gets tricky in the market. "The first thing an aggrieved investor should do," says the sales manager of a leading London brokerage, "is to try to distinguish between the vagaries of the stock market itself and the possibility - and I repeat, possibility - that his broker just isn't cutting it. A sliding market can make even the most honest broker look bad."

Once the investor has made up his mind that it's the broker, not the market, who's at fault, he has a number of avenues of recourse open to him. Depending on the severity of his grievances, he can trade his customer's man for a new one within the same house, take his business elsewhere, or - if he has suspicions of chicanery backed by solid evidence - refer the matter to arbitration procedures offered by the major stock markets, or even haul the rascals into court. None of these, however, can be done without some wear and tear.

Even if it's simply a matter of distaste for a particular customer's man ("I can't seem to get through to that idiot," is the way it is sometimes expressed), the move may not be easy. Brokerage houses do not like shifting accounts around in-house. It's bad for morale. It makes it look as though the house is impugning the skills of one broker against another. And it pricks at the heart of a universal brokerage commandment: Thou shalt not steal a customer from thy fellow broker - in this house, anyway. The new man, in other words, may feel slightly soiled, at least in the eyes of his brethren. Brokerage houses prefer conciliation. If that fails, and the account is big enough, they will probably make the change, however.

Breaking off with the firm altogether is simplified if the investor has personal possession of his securities. Otherwise, he must go to his new brokerage house, fill out .a form authorizing transfer of the securities, sign it, and generally wait several days for the switch to occur.

All this presumes that the investor is simply displeased with the way his portfolio has been performing and wants to try his luck elsewhere. Unfortunately there are times, too, when an investor feels he has actually been victimized. He may feel, for instance, that his account has been "churned" - that shares were bought and sold merely to generate commissions for the broker. He is likely to get that feeling when he balances the market value of his portfolio, say, six months ago against what it is today, and finds that the broker has done appreciably better than he has in the interim.

But that tabulation alone will get him nowhere in court or in arbitration before the London Stock Exchange, although "churning" is a violation of Rule 405 of the NYSE constitution.

Complaints of "churning" largely apply to discretionary accounts, and Rule 405 specifies that a broker must have a firm knowledge of his customer's investment objectives. For the protection of all concerned, this is best stated in writing. But even then, an unhappy investor must produce solid evidence that the broker not only violated the understanding, but did so in bad faith. And that takes meticulous evidence, hard to get. Proof of loss - the basis of any suit - is also difficult, since hindsight or "what might have been" doesn't count.

A case of "bad faith" might be made of the following ingredients: A novice investor inherits £30,000, and a broker is told in writing to invest it conservatively, for income. But the broker has an allotment of Hot Shot Software, a new underwriting, and is having trouble getting rid of it. So he buys 500 shares for the investor. Hot Shot not only produces no income, it bombs altogether before the broker can shuffle the customer into something more substantial. In court, he should be a sitting duck.

Another case in which an investor has hopes of collecting is when he can prove his broker is buying stock for him that he is actively selling off for other accounts. This is a violation of the Securities & Exchange Act (Rule 10-B 5). In a notable recent case, Merrill Lynch settled up with retail customers who charged that Merrill knew that Douglas Aircraft was about to report large quarterly losses, tipped off its institutional customers (who began to sell) but let retail customers go right on buying Douglas.

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Some Suggestions For The Investor

Some suggestions for the investor: (1) Read not just annual reports, but interim ones, plus company surveys by Standard & Poor's and Moody's; read, too, such publications as The Wall Street Journal, and Business Week - to follow company news, and business trends; (2) meet with your registered rep at least monthly to fix instructions; (3) before taking an extended trip, give the broker your itinerary plus any needed "open order" (to buy or sell at a price); (4) acquaint your wife with your plans; finally, be cynical about every scrap of information to come across - and be leery of investment tip sheets.

Besides executing orders efficiently, a good broker will keep you informed - and look... see: Some Suggestions For The Investor