Full Disclosure of the Financial Markets

The Securities Act of 1933 which is often referred to as the “truth in securities” law has two basic objectives:

• It requires that investors receive financial and other relevant information concerning securities offered for public sale.

• It prohibits deceit, other fraud and misrepresentations in the sale of securities.

The full disclosure is the cornerstone of the financial markets. It is the duty of the broker to accurately represent investments. But a broker cannot fail to disclose or misrepresent the nature or the risk which is associated with a given investment. A broker cannot omit to tell material or important information about recommendations to an investor. All the material information would include the risks which are associated with a plan of investing or the costs that are associated with an investment.

A duty of fair dealing is owed by the brokers to their customers. This fundamental duty is derived from the Securities Exchange Commissions (SEC) antifraud provisions. A broker represents to its customers that it will deal fairly, in accordance with the standards of the profession, by virtue of engaging in the brokerage profession (that is from hanging out the brokers’ business sign or “shingle”), under the so-called “shingle” theory.

The SEC, based on this important representation through enforcement actions and interpretive statements and through case laws and the courts has set forth specific duties for brokers. The duties included are:

• Execute orders promptly

• Disclose certain material information (the information the customer would consider important as an investor)

• Charge prices reasonably related to the prevailing market

• Fully disclose any conflicts of interest

Failure to disclose information to the customer about commission rates or other fees, investment decisions, conflicts of interest and certain risks are all violations of the SEC. They are considered as omissions or misrepresentations of material facts.

The National Association of Securities Dealers (NASD), The New York Stock Exchange (NYSE) and some other registered exchanges are Self Regulatory Organizations (SRO). Each of these SROs has additional rules that reflect the importance of fair dealing and is overseen by the SEC. For example, NASD’s Rules of Fair Practice must be complied by the NASD members/brokers. In general, these rules generally require that the brokers observe high standards of commercial honor and just and equitable principles of trade in conducting their businesses.

Misrepresentation is defined as a false representation of a matter of fact which should have been disclosed and which deceives another, so that they act upon it to their injury, by the NASD. It is stated that every member/broker shall send a statement of account (“account statement”) to every customer, with a frequency of not less than once every calendar quarter as stated by the NASD Rule 2340. A description of any securities positions, money balance, money balances, or account activity, and/or account activity during the period since the last statement was sent to the customer must be contained within the statement.

The statement is not limited to but must include detailed account activity that includes:

• Purchases.

• Sales.

• Interest credits or debits.

• Charges or credits.

• Dividend payments.

• Transfer activity.

• Securities receipts or deliveries.

• Journal entries relating to the securities or funds that are in the possession or control of the broker

Any customer should be concerned about possible fraudulent activity if he receives an account statement that does not disclose this information.

Intentional conduct designed to deceive the investors by controlling or artificially affecting the market for a security is fraudulent. This is defined as manipulation. A number of techniques to affect the supply of, or demand for, a stock can be involved in manipulation. This includes:

• Spreading false or misleading information about a company

• Rigging quotes, trades or prices to create a false or deceptive picture of the demand for a security

The duty of best execution requires a broker to seek to obtain the most favorable terms that are available under the circumstances for customer orders and it also stems from the SEC’s antifraud provisions.

If a broker omits material information or fails to accurately represent an investment about an investment, the broker may be liable for a client’s losses.