Should online brokerages bear any responsibility when their customers lose loads of investment money?
The debate has roared at several recent industry events, and it is expected to be a big issue at a Securities Industry Association meeting this month. Also, plaintiffs’ lawyers say more investors are taking legal action against cyber brokerages, charging that they shouldn’t have let them engage in unsuitable, risky trading practices.
The National Association of Securities Dealers has long required traditional stock brokerages to make investment recommendations that are suited to customers. The rule is designed to prevent stockbrokers from pitching too risky products to conservative investors.
In the online brokerage world, however, it’s unclear if a “suitability” rule should apply.
In Indianapolis, a three person arbitration panel ruled last month in favor of an Ameritrade customer, Lael Desmond, who lost $40,000 trading. His lawyer, Mark Maddox, argued that Ameritrade should not have let Desmond use margin, or borrowed money, as extensively. The panel awarded Desmond $40,000 in fees and compensatory damages.
Ameritrade’s attorney, Pat Griffin of Omaha argued that suitability should not apply to online or discount brokerages because they do not give investment advice. They merely offer a trading venue.
“If all an online broker does is execute trades, then there should be no suitability requirement,”
says Matt Nestor, director of the Massachusetts Securities Division. “A customer should have the right to blow up their own account.”
But Net brokerages are offering more services, including advice. In the Net world, that may amount to a “solicitation,” says Joe Borg, director of the Alabama Securities Commission. In general, he says online brokerages, through advertising, have raised expectations of profits. He thinks the brokerage should be required to curb some investors from taking undue risks.” We need to talk about what the requirement should be, he says.
Online brokerages generally oppose an online suitability rule. Mike Hogan, lawyer for DLJ direct, argues that online customers want investment research and advice, and they want it delivered electronically, not by a traditional broker. If you start adding suitability requirements, you will stifle innovation, he says. “You undo the value of the Internet.”
For the moment, lawyers say they are hearing from more online investors. “A lot of customers just don’t understand the stock market,” says a Los Angeles lawyer.