FINRA Examinations Determine Brokerage Firms are Not Monitoring Client Risk Tolerance

Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses as a result of their broker excessively trading and churning their accounts. Brokers have been known to take advantage of clients who have margin accounts and give them permission to trade at will. Although investors place a great deal of trust in their broker-advisors, sometimes this confidence is abused.

FINRA, the federal securities regulator, found in a recent report that brokers don’t always pay attention to customers’ risk tolerance and violate FINRA rules on risk monitoring. To say this is no surprise to the attorneys at Stoltmann Law Offices, who have fifty years of combined experience representing investors in claims against brokerage firms, is an understatement. According to FINRA, “Firms are required to monitor the risk of the positions held in these accounts during a specified range of possible market movements according to a comprehensive written risk methodology,” which has a stack of rules governing the conduct of brokers and the firms that supervise them.

FINRA’s guidelines on informing clients on portfolio risk include the following:

• Maintaining a comprehensive written risk methodology for assessing the potential risk to the member’s capital during a specified range of possible market movements of positions maintained in such accounts;
• Monitoring the credit risk exposure of portfolio margin accounts both intraday and end of day; and
• Maintaining a robust internal control framework reasonably designed to capture, measure, aggregate, manage, supervise and report credit risk exposure to portfolio margin accounts.

In plain English, brokerage firms are required to keep an eagle eye on how much downside risk is involved with every portfolio and communicate that to clients on a regular basis. How much money can you lose on any given day? That’s the question every broker should be able to answer without hesitation, especially when it comes to margin accounts and “alternative strategy” portfolios.

Note: Brokers are not allowed to trade without your explicit written permission unless you give them “discretionary” authority over your account, which often opens the door to overtrading and other abuses. They also must carefully vet all trades and investments with you to ensure that the vehicles they are selling meet your financial goals and risk tolerance. They must also receive your written permission to use “leveraged” investment strategies, which employ greater risk and potential for loss. If you choose to take on more risk, they must explain in clear detail the downside of such an investment.

Have you invested with brokers who have sold you money-losing or overpriced investments or traded without your permission? FINRA and the SEC have strict rules on disclosing risk profiles on all investments sold by brokers and investment advisers. If they fail to fully inform you of downside risk or vet shady companies offering investments, you may have a case in arbitration.

Firms are also legally required by FINRA to monitor and supervise what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the vehicles sold. Broker-dealers and advisors are also required to fully vet all of the investments they are selling to determine if they are suitable for your age and risk tolerance. Investors can file FINRA arbitration complaints if these rules are broken. You can often avoid rogue broker-advisors by checking their backgrounds through BrokerCheck,

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!