More than 6,000 arbitration claims are being filed each year with the various self-regulatory agencies. It follows that more and more brokers are finding themselves involved in these claims with customers. Regardless of the merits of such claims, and despite the fact that customers win arbitrations only 50 percent of the time, being named as a respondent in such a proceeding can be costly and aggravating, even if a broker ultimately wins.

In later columns, we will examine the various issues raised in the course of a securities arbitration, but this column will examine how to avoid it altogether. No set of procedures or suggestions can stop a customer from filing a frivolous claim. However, designing a well-thought-out plan may enable a quick resolution to a dispute, should one arise.

Briefly stated, there are a few broad categories of customer claims. The first of these is churning, in which a customer alleges that the broker purchased and sold securities solely to generate commissions without regard for the customer’s investment objectives or goals. The second is unauthorized trading, in which a customer alleges that the broker entered transactions into the account without the customer’s knowledge or approval. A third category is unsuitability, in which the customer alleges that the broker recommended investments that were not appropriate for the customer’s investment goals, age or objectives. Finally, in material misrepresentations or omissions, a customer alleges that the broker intentionally misled him or failed to disclose a material fact about an investment.

Brokers and customers often fail to realize the importance documentation plays in arbitrating customer disputes. It cannot be stressed often enough: Documents are the most important piece of evidence in a brokerage dispute. Most disputes relate to what someone said — either what a broker said about a particular investment, what a customer said about objectives or financial health, or what either party said in any of the thousands of other conversations that occur between brokers and clients every day across the country.

While I am not suggesting that every word spoken between a customer and his broker be recorded and documented, a few simple procedures can bolster a customer’s claim or a broker’s defense. None of these suggestions is time consuming, and all can go a long way toward resolving a dispute.


Every brokerage firm requires certain documentation from a new client and continuous updates as the relationship progresses. What many market participants fail to realize is that these documents are, for the most part, required by various securities regulations. Furthermore, the information contained in these documents is strong evidence at a hearing, regardless of what a party says at that hearing about later changes to information in those documents.

The most basic new account document is probably the most important — the new account form. When one realizes that this form is probably one of the most critical documents in a wide variety of customer disputes, the lack of attention paid to it by many brokers and customers is mind boggling.

Therefore, complete the new account form properly and review it annually with the customer. Although most firms do not have the customer sign the new account form, a written verification of the form will go a long way towards resolving disputes over this information.

In more than 75 percent of customer arbitrations, the customers allege that the information on the new account form is materially inaccurate in one way or another. This indicates that either customers are not careful in what information they provide to the broker when they open their account, or brokers are not carefully ascertaining essential information regarding their customers. In either event, and regardless of who is at fault, a signed or verified new account form will focus the customer and the broker on the information, and ensure that the broker is acting on accurate information.

The industry has been slow to incorporate a signature line into the new account forms, although this has been changing in recent years. Brokers should, if permitted by their firms, have blank new account forms sent to the customer. The customer should complete them in his own handwriting, following instructions that underscore the importance of the information and its accuracy. Realizing that the nature of the retail business does not always allow this luxury, brokers should carefully review all of the information on the form with a new customer. Brokers should then complete every item on the form, even using “N/A” for items that are not applicable. Even if the form does not require a customer’s signature, send the form to the customer with a letter that says, “Here is a copy of the form I completed based on our conversation. Please review it carefully, and let me know immediately if anything is incorrect.” Keep that letter with the form. If the customer makes a correction, send the corrected form with another letter. Keep a copy of that letter as well. This is the time to start keeping small manila file folders for each customer.

This form must be kept up to date. Often, in a long-term broker-client relationship, the customer’s objectives or financial status change. Brokers would serve themselves well to be sure that the account documentation reflects these changes in order to avoid problems and misunderstandings later.

For example, customers who begin their relationship with a broker when they are 35 years old undoubtedly have different assets and investment objectives when they reach 40 and their children start to grow. Annual reviews of account information, which can be incorporated easily into the annual review of the account, will avoid having a mismatched investment objective and trading activity.


The vast majority of communications between brokers and their clients are oral. Brokers should strive to be clear in their client communications, and to confirm any material conversations in writing. Critical conversations often are recalled differently years later by the parties. We all have good memories, but those memories tend to become jaded in the middle of a dispute. Written confirmation of important conversations removes this problem.

For example, when a customer departs from a broker’s recommendation in a way that substantially increases his or her potential risk of loss, the broker should make a note of it and confirm the conversation in writing. This also should be the case if a customer insists upon purchasing a security that the broker is not familiar with or if a wealthy customer decides to begin actively trading a volatile security. All of these conversations should be confirmed in writing by the broker or the compliance department. Personal Notes Brokers should strive to keep a “paper trail” of their activities and maintain a calendar, daily planner or some other record of appointments and conversations with clients. Regardless of where you make those notes, make them. Contemporaneous notes of conversations or meetings are effective in resolving complaints that often arise years after the fact. No one could possibly remember a conversation that occurred three years ago. However, a note on a diary, made at or about the time of the conversation will not only jog one’s memory, it will provide additional evidence that the conversation occurred.

Many of my broker clients use composition books or some other type of bound notebook to keep notes of conversations with customers and compliance and branch managers. The book is simply a running diary of the broker’s day-by-day activity and provides a chronology of events in the broker’s workday. These notes can be extremely helpful when attempting to reconstruct a particular conversation or series of events.

Using a notebook is a daunting task at first because the most effective notebook is one that is always with the broker and used all the time. It takes a fair amount of self-discipline to get into the habit of using one book to record all notes. However, the benefits of such efforts are enormous.


Keep telephone bills as evidence of calls placed from the office. Most brokerage firms have an internal computer system that records all telephone numbers dialed, and the time, date and length of the call. Brokers should ask their operations manager for reports for not only their lines, but also for their assistants’ lines. The reports can be filed away on a monthly basis. On a similar note, keeping telephone message pads with carbonless copies as records of all calls received also will help establish the dates of telephone calls in later disputes.

Although these may seem to be painstaking tasks, there are a large number of disputes where brokers or customers claim that they did not speak before a particular transaction. Phone records showing a call are compelling evidence that the conversation occurred and are often invaluable. Similarly, the absence of a call from the broker’s or client’s usual telephone is often enough to persuade the arbitrator or court that the call did not occur. Many brokers believe that they can obtain telephone records if needed, years later, from the telephone company or their firm. This is not true. Most of the telephone companies periodically purge their database of calls, some as frequently as every 90 days. Firms also purge their internal databases, as maintaining in-house records of every call made might well require a warehouse.


Compliance procedures, trade confirmations and account statements are all items that help ensure that customers are aware of what is happening in their account. They also ensure clear communication between brokers and clients. With a minimal amount of work and a conscious effort to record material events in dealing with customers, brokers can help themselves and their firm resolve any disputes that do occur, and hopefully prevail in any unfounded arbitration claims that may arise. Although the procedures may be time consuming in some cases, a recent survey reported that the average customer arbitration costs a brokerage firm $50,000 to defend. Avoiding one dispute might make the minimal time expenditure worth the effort.

Should every broker use these procedures? Probably not. Could every broker benefit from these procedures? Absolutely.

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.