Last month, the Financial Industry Regulatory Authority (FINRA) issued an investor alert to remind investors that a careful review of their periodic brokerage account statements is an important way for them to stay informed about what brokers are doing with their money.
The alert, titled “It Pays to Understand Your Brokerage Account Statements and Trade Confirmations,” notes that brokerage account statements can reveal errors or misconduct by brokers or brokerage firms. For example, the statement could reveal unauthorized trading or excessive fees.
The FINRA Alert to Inform & Educate Investors
Brokerage firms are required to provide their customers with account statements and many do so quarterly. Firms are also required to notify investors with trade confirmations at the time, or before, completion of a transaction. These statements and confirmations must be accurate, a requirement that securities regulators take very seriously, the alert says.
By issuing the alert, FINRA wants to familiarize investors with the key elements of their account statements and confirmations. A thorough understanding of these documents allow for the quick identification of problems so investors can inquire right away if a transaction or entry is confusing or was not authorized. FINRA recommends that investors confirm any oral communication they have with a firm in writing.
Investors should also be aware that the brokerage firm with whom they opened their account may not be the firm that issued the account statements and confirmations. Firms that mostly make recommendations, take orders have arrangements with clearing and carrying firms to complete the transactions. These are called introducing firms.
The clearing and carrying firms are the ones that finalize the trades and hold the funds or securities. Investors who work with introducing firms generally received their statements from a clearing firm.
Possible Red Flags in Account Statements
The alert goes on to list the key elements of account statements and described some red flags that can help investors spot trouble.
For example, statements feature an account summary that gives a detailed description of account performance from the end point of the previous statement, including the total value of the account, which can be helpful when it come to decisions regarding buying and selling.
Possible red flags are incorrect information or activity the investor did not authorize or expect. Another warning sign is unrealistic performance. If returns are always positive, odds are something isn’t right.
Income is also generally featured on a statement, and may be found in the account summary. Red flags in this area include sources of dividend and interest income listed on the statement that are unfamiliar to the investor, and income that appears on the statement but has not shown up in the investor’s account.
FINRA also warns investors to exercise caution when dealing with margins, which are loans from a brokerage firm secured by the securities the investors buys. They have unique costs and risks, like drop in the value of the security that renders the margin suddenly undersecured.
An account statement should tell investors which securities, if any, have been purchased on margin, plus list all the margin interest charges an investor has paid on the loan in a given period. Red flags that might indicate misconduct include securities purchased on margin without authorization from the investor as well as margin costs that exceed the disclosed interest rate.
The alert includes several more examples. It also urges investors to be mindful of investment objectives, which are included on many account statements.
An investment objective characterizes an investor’s strategy, such as a growth strategy for a person who is willing to invest in riskier securities for a shot at a high yield, or a conservative strategy for an individual who is risk averse. Investors need to make sure that the investment objective listed on the account statement matches their goals and risk tolerance, and that the account activity reflects their goals as well.
Consolidated Account Statements,
Next, the alert seeks to educate investors about consolidated account statements, which combines information on most or all of a person’s financial holdings into a single statement no matter where the assets are held. Such statements are getting more popular and investors need to know that they supplement, but do not replace, the brokerage account statement require by regulators. In the case of a dispute with a broker or a brokerage firm, the official brokerage statement will always be used, even if an investor received both kinds.
Careful Review of Trade Confirmations
A careful review of trade confirmations is also essential, according to the alert. These confirmations include key details, such as the date and time of the transaction and the price and the quantity of shares. Given the how easy it is to make mistake – the alert points out that a single keystroke can make the difference between 100 and 1,000 shares – investors should scrutinize this information as soon as they receive the confirmation.
Trade confirmations also show whether a broker acted as an agent for an investor, or as a principal for the firm’s own account. If the firm acts as an investor’s agent, then it must disclose the commission it charged. This commission might appear on the confirmation, or be disclosed upon request by the investor. If the firm acts for its own benefit, any markup or markdown must be disclosed on the confirmation, the alert says.
Possible Red Flags in Trade Statements
As for red flags, they are basically the same for trade confirmations as they are for account statements. The alert provides a checklist help investors head off trouble.
For one, the alert recommends that investors match up trade confirmation information with their account statement to confirm the date and the amount. Investors should question the brokerage firm about any unauthorized trades, and document whatever is said in writing.
A trade can be unsolicited or solicited, as the confirmation is supposed to indicate. Make sure the trades are listed in the right category. If an investment was the broker’s idea, but it is listed on the confirmation as an unsolicited trade, this is a red flag.
The confirmation also allows investors to scrutinize fees, the alert says.
If Problems or Red Flags Are Found
Finally, the alert says that investors who identify problems in their statement or confirmation should contact their broker or brokerage firm as soon as possible. If the broker or firm does not clear up the inaccuracy or discrepancy, FINRA encourages investors to file a complaint using its online Complaint Center.
Guiliano Law Group
Investors suffering losses or damages caused variable annuity switching may be able to recover damages. Our practice is limited to the representation of investors in claims, for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
