On-Line Trading and Brokerage Firm Liability (1)Does your brokerage firm have liability for on-line trading losses? Recent occurrences in the retail brokerage industry, including “no commission” trading and the introduction of apps that allow on-line trading from the convenience of mobile devices, have enticed record numbers of first-time investors to open brokerage accounts and trade securities. Many of these new investors have seen their hard earned money evaporate virtually overnight after brokerage firms approved them to use sophisticated products and services such as day-trading, margin and options. The actions of these firms coupled with staggering losses in customer accounts have left many first-time investors wondering: do brokerage firms have any liability for such losses? They most certainly could, based upon the duties imposed on them by securities regulators.

Typically,  brokerage firms do not have liability for losses incurred in customer accounts when the trading was initiated by the customer on-line.  However, if the brokerage firm violated a duty imposed upon it by law or rules of the securities industry, they can indeed be held liable for such losses, if the  violation(s) is/are the cause of the losses.

As a result of these recent occurrences, securities regulators, including the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”) have become particularly concerned with brokerage firm’s: 1) communications with the public; 2) suitability obligations; and 3) the duty to supervise.

Communications with the Public

FINRA, the self-regulatory agency that governs all broker-dealers (“BD’s”) and their associated persons (i.e. stockbrokers) in the U.S. has in place FINRA Rule 2210 which creates a duty for BD’s to monitor the communications they have with the public. Under the rule, they have an obligation to ensure, among other things, that all communications are based upon “principles of fair dealing” and provide a sound basis for evaluating the facts regarding any particular security, type of security, strategy or service.

Of particular interest of late with regulators is the proliferation of trading app platforms that include “game-like” features intended to influence customers to engage in certain trading or activities.

Suitability Obligation of Broker-Dealers

In addition to rules governing communications with the public, BD’s also have a duty to make suitable recommendations to its customers under FINRA Rule 2111 and/or to act in the best interest of its customers under Regulation Best Interest (Reg BI) promulgated under the Securities Exchange Act of 1934.

Notably, under both FINRA Rule 2111 and Reg BI, an explicit distinction is made between an investment (i.e. stocks, bonds and options) and an investment strategy (i.e. the use of margin, short selling or option strategies). Thus, the BD has an obligation to ensure that both are suitable or in the best interest of the retail customer before they can recommend either one.

If BD’s have suitability and communication duties to their clients, how do they live up to that obligation?

Obligation to Supervise

BD’s have a duty to supervise their employees and associated persons (FINRA Rule 3110) by having adequate supervisory procedures in place (FINRA Rule 3120). Accordingly, BD’s have a duty to develop comprehensive supervisory systems for communication methods with customers.  Such procedures necessarily include surveilling for red flags of behavior that potentially violate their duties. Thus, if a BD’s communications with customers regarding certain securities, strategies or services do not adequately disclose potential risks associated with such products and services or if their communications are deemed recommendations, such events can trigger their suitability duties under FINRA Rule 2111 and Reg BI and cause them to be liable for your losses.

Indeed, a February 1, 2021 report from FINRA entitled 2021 Report on FINRA’s Examination and Risk Monitoring Program, makes clear these precise issues are  being scrutinized.  Specifically, the report notes:

2020 witnessed a surge in new retail investors entering the markets via online brokers, as well as an increase in certain types of trading, including options. Some online broker-dealers’ apps—as well as those offered by other financial services and consumer-oriented businesses—include interactive and “game-like” features, as well as related forms of advertising and marketing. Such features affect many aspects of how firms interact and communicate with customers, from initial advertisements through the opening of accounts, recommendations and the presentation of different investment choices.

While such features may improve customers’ access to firm systems and investment products, they may also result in increased risks to customers if not designed with the appropriate compliance considerations in mind.

So, does YOUR brokerage firm have liability for the trading in your on-line brokerage account?

What Should You Do?

If you believe that you sustained losses due to your broker’s and/or brokerage trading platform’s failure to live up to their duties, you should speak with a legal professional experienced in the securities industry, as the facts and circumstances of each case are unique.  The Law Office of Kevin J. Deloatch, Esq. has an extensive securities law practice and over 30 years of experience on Wall Street. If there is a basis for filing a claim your time may be limited. Call today at (646) 792-2156 for a free consultation.