Investment promoters and salesmen who make recommendations to customers must provide prospective investors with balanced, complete sales presentations that fairly present the major risk factors along with the positive aspects and potential rewards. Securities salesmen must disclose to the investor "all material information necessary to make the representations made not misleading."
Under the rules of major stock exchanges, a broker may not make an investment recommendation unless he has reasonable grounds to believe that his recommendation is suitable for the customer in light of the customer's other securities holdings, financial situation and investment objectives. This is commonly referred to as the "Suitability Rule." An equally important rule is the "Know Your Customer Rule," which requires the broker to make reasonable efforts to obtain information about the customer in order to determine what investments to recommend. These rules are the foundation of the broker-customer relationship. "Caveat Emptor" simply does not apply when brokers recommend securities.
Churning occurs when a securities broker engages in excessive trading in disregard of a customer's investment objectives for the purpose of generating excessive commissions. Proof of a churning claim requires evidence that: (1) the broker controlled trading in the account, (2) trading was excessive in light of the customer's investment objectives, and (3) the trading was done in reckless disregard of the customer's best interests for the purpose of generating excessive commissions. Signs of excessive trading include frequent short term trading, repeated turnover of the portfolio and excessive commissions.
Improper Execution of Trades
Unless the customer has given his broker discretionary trading authority, which typically is done in writing, a broker must obtain his customer's advance permission before executing any purchase or sale of investments. A broker must always follow the customer's instructions concerning the buying and selling of securities, and must provide the customer with timely trade execution at the best available prices.
Federal and state laws prohibit market manipulation, excessive mark-ups or mark-downs of securities, and the quoting of fictitious prices. Pricing violations sometimes occur when small, "boiler room" brokerage firms attempt to make a killing by selling thinly-traded, over-the-counter securities at highly inflated prices.
Bad Investment Advice
While an investment promoter or salesman cannot be sued simply because his or her enthusiasm for a particular stock turned out to have been misplaced, the broker must exercise reasonable diligence to investigate a security so that he can determine whether it is suitable for the customer. Claims for "bad investment advice" typically involve negligence, unsuitability or misrepresentation.