Expert Witness Blog

Securities expert witness Chris McConnell, AIFA®, writes on a 2007 court decision requiring some stock brokers to register and comply with the Investment Advisors Act of 1940.

Prior to this decision (FPA v. SEC) what was the brokers' responsibility to customers' accounts? Over 1 million customers may find new customer account agreements in the mail. Customers should read and understand potential liability-shifting and the gravity of the decision on previous, current and future investment advice and recommendations. Some customers especially trustees, unwittingly relinquish rights even before investments occur; fiduciary duty appllies before and during review and monitoring of the account agreement with the broker dealer or investment adviser and any changes thereto. Notably, stock brokers (Series 7 licensees, registered representatives, supervised by broker dealers) are required to adhere to FINRA (formerly NASD) rule 2310 regarding Suitability and the NYSE (New York Stock Exchange) rule 405 regarding “Know (and update) your Customer” as they relate to securities recommendations in contrast to the customer's cash flow needs, time horizon, age, tax bracket, tolerance for risk (fluctuation to principal), income (amounts and sources), net worth (liquid and total) and other factors.