Investment losses that result from broker misconduct often look, at first, like ordinary market losses. The account declined. The broker offers an explanation tied to market conditions. The investor accepts it and moves on. In many of these cases, what actually happened was something different — a violation of the legal obligations brokers owe their customers. This article describes the five most common types of broker misconduct that lead to FINRA arbitration claims, and what each looks like in practice.
One: Unsuitable Recommendations
FINRA rules require brokers to recommend only investments that are suitable for the specific customer receiving the recommendation. Suitability is assessed against the customer's age, financial situation, investment experience, risk tolerance, time horizon, and stated objectives. A recommendation that is appropriate for one investor may be entirely wrong for another, and the broker's obligation is to know the difference and act accordingly.
In practice, unsuitable recommendation cases arise when an investor's account holds products that are inconsistent with what they told their broker they needed. A retiree whose account documents reflect a conservative risk tolerance invested in leveraged products or speculative options. An investor who expressed the need to preserve capital concentrated in a single volatile position. An investor who was never asked about their objectives at all, because the broker was focused on a product they were incentivized to sell. In each case the account reflects what the broker wanted rather than what the investor needed.
If the investments in your account do not match the risk profile and objectives recorded at account opening — or if those questions were never meaningfully addressed — that discrepancy is worth examining.
Two: Unauthorized Trading
Without a signed discretionary account agreement granting the broker authority to trade on their customer's behalf, every transaction requires the customer's prior approval. This rule is straightforward. A broker who executes trades without that authorization violates FINRA rules, regardless of whether the trades were profitable and regardless of how long the broker and customer have worked together.
Unauthorized trading often comes to light when an investor reviews their account statements and finds transactions they do not recognize. It also appears in the form of a broker who notifies the customer of a completed trade after the fact, framing it as a time-sensitive opportunity that could not wait — or a broker who, over time, has come to treat the account as though they have authority they were never given. The fact that a trusting relationship existed between broker and customer does not create discretionary authority that was never documented in writing.
Three: Churning
Churning occurs when a broker trades an investor's account at a frequency designed to generate commissions rather than to serve the investor's financial interests. Each transaction produces compensation for the broker and the firm.
An account that is churned erodes in value regardless of what the market does — while the broker is paid on every trade.
Churning is typically identified through two metrics. The first is the portfolio turnover ratio — the total value of purchases in a year divided by the average account balance — which measures how frequently the portfolio is being replaced. The second is the cost-to-equity ratio, which reflects the percentage return the account must generate simply to break even on commissions and fees. When these figures are disproportionate to the account type and the investor's stated objectives, churning is the likely explanation. Account statements contain the data needed to perform this analysis.
Four: Misrepresentation and Omission
A broker's duty of disclosure runs in two directions. The broker must not make false or misleading statements about an investment, and must not omit material facts that a reasonable investor would consider important in making a decision. Violations can take the form of affirmative misstatements — describing a product as principal-protected when it is not, projecting specific returns as though they were guaranteed — or of omissions that leave the investor with an incomplete and misleading picture of what they are buying.
Common omissions include failure to disclose surrender charges or early redemption penalties in annuity or structured products, failure to disclose that the firm receives compensation for recommending a particular product — a conflict of interest that bears directly on the quality of the recommendation — and failure to adequately explain the liquidity constraints of products that cannot be readily sold. Account opening records, written communications, and any materials the broker provided at the time of the recommendation are relevant evidence in these cases.
Five: Failure to Supervise
Brokerage firms are required by FINRA rules to establish and maintain supervisory systems reasonably designed to achieve compliance with applicable securities laws and regulations. This is an independent obligation — not derivative of what any individual broker did — and when a firm's supervisory failures allow misconduct to go undetected or uncorrected, the firm is independently liable for the resulting investor losses.
Failure to supervise claims arise when a firm employs a broker with a prior disciplinary history without enhanced oversight, when internal compliance systems generate alerts that go uninvestigated, or when patterns of misconduct persist for extended periods without the firm taking corrective action. The significance of this claim is practical as well as legal: individual brokers may lack the financial resources to satisfy a substantial arbitration award, while the firm — which may be a large institution — represents a meaningful source of recovery.
Frequently Asked Questions
If my situation matches one of these categories, does that mean I have a claim?
Not necessarily. The categories described here are frameworks for identifying conduct that may give rise to a claim — not a checklist that produces a legal conclusion. Whether a viable claim exists depends on the specific facts: what the broker did, what was said and not said, what the account records show, and how the investor's losses connect to the broker's conduct. If your situation appears to fit one of these patterns, preserving your records and consulting an attorney is a reasonable next step.
Where can I check my broker's disciplinary history?
FINRA BrokerCheck, available at brokercheck.finra.org, is a free public resource that displays information about registered brokers and brokerage firms, including customer complaints, regulatory actions, and disciplinary history. A broker with a pattern of prior complaints is relevant context for evaluating your own situation.
How do I identify churning in my account?
Your account statements contain the information needed to assess churning. Look at the total value of purchases made during the year relative to your average account balance, and at the total commissions and fees paid relative to your account's size. If those figures seem disproportionate — or if your portfolio was frequently turned over without a clear investment rationale — that warrants further examination by an attorney.
Can I bring a claim based on something that was said verbally but never put in writing?
Yes, in appropriate circumstances. Misrepresentation and omission claims frequently involve statements made in conversations that were never documented. The challenge is evidentiary — establishing what was said, in what context, and how it affected the investor's decision. Written communications, account opening documents, and any promotional materials provided by the broker are important supporting evidence. If you remember what was said, documenting your recollection now and preserving any related materials is worthwhile.
Good Pine P.C. represents investors in New York and New Jersey in FINRA arbitration proceedings.
We offer consultations in English and Korean.
This article is provided by Good Pine P.C. for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney–client relationship. Laws and regulations may change, and their application depends on specific facts and circumstances. You should consult a qualified attorney before taking any legal action based on this information.
