How to Help Clients Recover Stock Market Losses

How to Help Clients Recover Stock Market Losses

By Howard W. Hirschhorn, CPA

Have you ever received a call from a client who has just suffered a significant loss in the stock market by following a broker’s advice, or while preparing a client’s tax return have you noticed substantial security losses?

Rather than just recording the transaction on a tax return, you can offer your client valuable advice that may help recover those losses.

If a client’s account value declines, a broker may be held responsible if your client indicated, when he or she opened the account, that the primary investment objective was safety of principal and that he or she was seeking income for retirement and does not want to assume any risk.

If your client’s broker recommended that your client buy securities which are subsequently determined to be unsuitable, or if the broker churned (excessively traded) your client’s account, engaged in unauthorized trading, misrepresented the reasons for investing in a particular security or misappropriated funds, your client has the grounds to file a claim for reimbursement of losses with the Financial Industry Regulatory Authority (FINRA).

FINRA is a nongovernmental regulatory agency of the security industry created in July 2007 through the consolidation of the National Association of Security Dealers (NASD) and the member regulation, enforcement, and arbitration functions of the New York Stock Exchange.

Every brokerage firm and registered representative (stockbroker) must be a member in order to be in the securities business. There are very strict rules of conduct that must be adhered to that place the interest of the customer before the financial interest of the broker. If a rule is violated, the broker can be fined, ordered to make restitution to an investor from personal funds for losses incurred, suspended from investor trading for a period of time or, in the extreme case, barred from the securities industry for life.

When clients open an account with a brokerage firm, they sign a “new client agreement,” which contains the mutual rights and obligations that the customer and brokerage firm must adhere to. Within the fine print of the agreement, which most people do not read, there is a paragraph called “Arbitration.”

It states, in part:

This means that, after signing the new client agreement, an investor who finds that a broker who may have violated the FINRA rules cannot go to court and sue for losses. It has been agreed that all disputes must be arbitrated through the auspices of FINRA.

Because arbitration is final and nonappealable, parties usually prefer to mediate the dispute first. FINRA has a roster of mediators whose function is to facilitate communication between the parties, and to assist them in arriving at an equitable settlement. In private, the mediator will stress to the broker and/or brokerage house the strengths in a customer’s case, in order for them to agree to compensate the customer for losses. A mediator will also, in private, point out to the customer weaknesses in the customer’s claim, with the expectation that the customer will accept a lower amount of compensation. If both parties agree to be flexible and reach an agreement to settle the dispute, then a contract is signed that requires payment to be made within 30 days. FINRA will be notified that the claim was settled in mediation and that arbitration is not necessary.

Mediation of a dispute is voluntary; both parties agree to mediate with the hope of reaching an amicable settlement without the added expense of going to arbitration. If the parties find they cannot reach an agreement during mediation or, for a multitude of reasons, prefer to go directly to arbitration, a claim with the appropriate fees must be sent to FINRA for the selection of three arbitrators to hear the case.

Statistically, about 82 percent of all disputes that are presented to FINRA for mediation are settled with the customer receiving about 50 percent of the original claim. In arbitration, 50 percent of all claims are settled with the award determined to be about 50 percent of the claim. The arbitrator’s award is final and nonappealable.

Howard Hirschhorn, CPA, is a Financial Industry Regulatory Authority arbitrator and practices privately in Matawan, N.J. He can be reached at 732-566-7671.