Broker-dealers need to be proactive in monitoring their registered representatives, even when they act independently and don't represent the broker-dealer, say financial experts who participated in a recent webinar sponsored by the National Association of Independent Broker/Dealers.
If the firm's employee gives the impression he's acting on behalf of the firm during times when he's conducting business as an individual, the firm might be subject to a lawsuit if a disgruntled investor feels they were wronged and they want to take legal action.
Webinar participants cited one case that involved a broker who was selling investment products on his own that were not part of the investments offered by the broker-dealer he worked for. But the broker still represented himself as an employee of the firm when he gave individual advice. According to the investor who filed the lawsuit, the firm should have done more to oversee its employee's activities.
When a manager of a broker-dealer is served with a notice of a lawsuit, he should answer it immediately and not be afraid to ask for more time to gather information, if necessary, said Dennis Stubblefield, a lawyer who specializes in corporate and securities cases. He added that many firms make the mistake of not taking it seriously at first.
Next, the firm needs to get a profit-and-loss statement from the person who's suing because the suit often misrepresents the loss, said Chad Weaver of the law firm Edgerton and Weaver. "You have to get your arms around how bad it is," he added.
Houston Goddard of Girard Securities, an independent broker-dealer, said that broker-dealers should obtain the right to review employees' personal bank accounts as well as work activity. The broker in the above-mentioned scheme was paying investors out of his personal accounts and building a pyramid scheme before a client finally blew the whistle.
Girard warned that the number of these types of lawsuits are increasing and that broker-dealers should be willing to go to mediation early on. But, he added, firms should balance that by not settling suits too quickly or else they could get a reputation as an easy mark for frivolous lawsuits.
If you end up in arbitration, cautioned Stubblefield, be aware an arbitrator can be just that--arbitrary. "The arbitrator will do what he or she thinks is fair based on what the investor reasonably believed," he says.
Finally, Weaver advised firms to look at their representatives' accounts to determine if more unhappy investors are going to surface.