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Invest Wisely: Advice From Your Securities Industry Regulators

Aug. 1, 2007

This document provides basic information to help investors select a brokerage firm and sales representative, make an initial investment decision, monitor an investment and address an investment problem. It is intended to help you identify questions you should ask and warning signs to look for in order to avoid possible investment problems.  

If you need more information about a topic discussed in this brochure, or you think that the securities laws have been violated, you should contact the appropriate securities regulators. The names, addresses and telephone numbers of these organizations are listed at the end of this document.

Selecting Your Broker

Before making a securities investment, you must decide which brokerage firm – also referred to as a broker/dealer – and sales representative – also referred to as a stockbroker, account executive, or registered representative – to use. Before making these decisions you should:

  • Think through your financial objectives.
  • Talk with potential salespeople at several firms. If possible, meet them face to face at their offices. Ask each sales representative about his or her investment experience, professional background, and education.
  • Find Out about the disciplinary history of any brokerage firm and sales representative through FINRA BrokerCheck or by calling 1-800-289-9999.  FINRA BrokerCheck provides information on disciplinary actions taken by securities regulators and criminal authorities. Your state securities regulator also can tell you if a sales representative is licensed to do business in your state.

    Understand how the sales representative is paid; ask for a copy of the firm's commission schedule. Firms generally pay sales staff based on the amount of money invested by a customer and the number of transactions done in a customer's account. More compensation may be paid to a sales representative for selling a firm's own investment products. Ask what "fees" or "charges" you will be required to pay when opening, maintaining, and closing an account.

    Determine the level of service you need. Some brokerage firms provide recommendations, investment advice, and research support, while others may not. The charges you pay may differ depending upon what services are provided by the firm.

  • Ask if the brokerage firm is a member of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a brokerage firm becomes insolvent. Ask if the firm has other insurance that provides coverage beyond the SIPC limits. SIPC does not insure against losses attributable to a decline in the market value of your securities. For further information, contact SIPC at 805 Fifteenth Street, N.W., Suite 800, Washington, D.C. 20005-2207; or call (202) 371-8300.

Remember, part of making the right investment decision is finding the brokerage firm and the sales representative that best meet your personal financial needs. Do not rush. Do the necessary background investigation on both the firm and the sales representative. Resist salespeople who urge you to immediately open an account with them.

Making An Investment

The New Account Agreement

Generally, a brokerage firm will require a customer to sign a new account agreement. You should carefully review the information contained in this document because it may affect your legal rights regarding your account.

Ask to see any account documentation prepared for you by the sales representative. Do not sign the new account agreement unless you thoroughly understand it and agree with the terms and conditions it imposes on you. You can not rely on verbal representations from a sales representative that are not contained in this agreement.  

The sales representative will ask for information about your investment objectives and personal financial situation, including your income, net worth, and investment experience. Be honest. The sales representative will use this information in making investment recommendations to you.

Completion of the new account agreement requires that you make three critical decisions:

  1. Who will control decision-making in your account? You will control the investment decisions made in your account unless you decide to give discretionary authority to your sales representative to make investment decisions for you. Discretionary authority allows a sales representative to make investment decisions based on what the sales representative believes to be best – without consulting you about the price, the type of security, the amount and when to buy or sell. Do not give discretionary authority to your sales representative without seriously considering whether this arrangement is appropriate for you.

  2. How will you pay for your investment? Most investors maintain a cash account that requires payment in full for each a security purchase. An alternative type of account is a margin account. Buying securities through a margin account means that you can borrow money from the brokerage firm to buy securities and requires that you pay interest on that loan. You will be required to sign a margin agreement disclosing interest terms. If you purchase securities on margin (by borrowing money from the brokerage firm), the firm has authority to immediately sell any security in your account, without notice to you, to cover any shortfall resulting from a decline in the value of your securities. If the value of your account is less than the amount of the outstanding loan – even due to a one day market drop – you are liable for the balance. This may be a substantial amount of money even after your securities are sold. The margin account agreement generally provides that the securities in your margin account may be lent out by the brokerage firm at any time without notice or compensation to you.
  3. How much risk should you assume? In a new account agreement, you must specify your overall investment objective in terms of risk. Categories of risk may have labels such as "income," "growth," or "aggressive growth." Be careful you understand the distinctions between these terms, and be certain that the risk level you choose accurately reflects your investment goals. The investment products recommended to you should reflect the category of risk you have selected.

When opening a new account, the brokerage firm may ask you to sign a legally binding contract to arbitrate any future dispute between you and the firm or your sales representative. This may be part of another document, such as a margin agreement. The federal securities laws do not require that you sign such an agreement. You may choose later to arbitrate a dispute for damages even if you do not sign the agreement. Signing such an agreement means that you give up the right to sue your sales representative and firm in court.

You may have your securities registered either in your name or in the name of your brokerage firm. Ask your sales representative about the relative advantages and disadvantages of each arrangement. If you plan to trade securities regularly, you may prefer to have the securities registered in the name of your brokerage firm to facilitate clearance, settlement, and dividend payment.

The Investment Decision

Never invest in a product that you don't fully understand. Consult information sources such as business and financial publications. Information regarding the fundamentals of investing and basic financial terminology can be found at your local library.

Ask your sales representative for the prospectus, offering circular, or most recent annual report – and the "Options Disclosure Document" if you are investing in options. Read them. If you have questions, talk with your sales representative before investing.

You also may want to check with another brokerage firm, an accountant, or a trusted business adviser to get a second opinion about a particular investment you are considering.

Keep good records of all information you receive, copies of forms you sign, and conversations you have with your sales representative.

Nobody invests to lose money. However, investments always entail some degree of risk. Be aware that:

  1. The higher the expected rate of return, the greater the risk; depending on market developments, you could lose some or all of your initial investment. With some investments, such as options, you can lose more than the amount of your investment. Ask whether the security can be redeemed or if there is a market for it.
  2. Some investments cannot easily be sold or converted to cash. Check to see if there is any penalty or charge if you must sell an investment quickly or before its maturity date.
  3. Investments in securities issued by a company with little or no operating history or published information may involve greater risk.
  4. Securities investments, including mutual funds, are NOT federally insured against a loss in market value.
  5. Securities you own may be subject to tender offers, mergers, reorganizations, or third party actions that can affect the value of your ownership interest. Pay careful attention to public announcements and information sent to you about such transactions. They involve complex investment decisions. Be sure you fully understand the terms of any offer to exchange or sell your shares before you act. In some cases, such as partial or two-tier tender offers, failure to act can have detrimental effects on your investment.
  6. The past success of a particular investment is no guarantee of future performance.

Protect Yourself

A high pressure sales pitch can mean trouble. Be suspicious of anyone who tells you, "Invest quickly or you will miss out on a once in a lifetime opportunity."


  • Never send money to purchase an investment based simply on a telephone sales pitch.
  • Never make a check out to a sales representative personally.
  • Never send checks to an address different from the business address of the brokerage firm or a designated address listed in the prospectus.

If your sales representative asks you to do any of these things, contact the branch manager or compliance officer of the brokerage firm.

Never allow your transaction confirmations and account statements to be delivered or mailed to your sales representative as a substitute for receiving them yourself. These documents are your official record of the date, time, amount, and price of each security purchased or sold. When you receive them you should verify that the information in these statements is correct.

Certain activities may indicate problems in the handling of your account and, possibly, violations of state and federal securities laws.

Be alert for:

  1. Recommendations from a sales representative based on "inside" or "confidential information," an "upcoming favorable research report," a "prospective merger or acquisition," or the announcement of a "dynamic new product."
  2. Representations of spectacular profit, such as, "Your money will double in six months." Remember, if it sounds too good to be true, it probably is!
  3. "Guarantees" that you will not lose money on a particular securities transaction, or agreements by a sales representative to share in any losses in your account.
  4. An excessive number of transactions in your account. Such activity generates additional commissions for your sales representative, but may provide no better investment opportunities for you.
  5. A recommendation from your sales representative that you make a dramatic change in your investment strategy, such as moving from low risk investments to speculative securities, or concentrating your investments exclusively in a single product.
  6. Switching your investment in a mutual fund to a different fund with the same or similar investment objectives. Unless there is a legitimate investment purpose, a switch recommended by your sales representative may simply be an attempt to generate additional commissions for the sales representative.
  7. Pressure to trade the account in a manner that is inconsistent with your investment goals and the risk you want or can afford to take.
  8. Assurances from your sales representative that an error in your account is due solely to computer or clerical error. Insist that the branch manager or compliance officer promptly send you a written explanation. Verify that the problem has been corrected on your next account statement.

If You Have a Problem

If you have a problem with your sales representative or your account, promptly talk to the sales representative's manager or the firm's compliance officer. Confirm your complaint to the firm in writing. Keep written records of all conversations. Ask for written explanations.

If the problem is not resolved to your satisfaction, contact the appropriate regulators listed at the end of this document. Investor complaint information assists these regulators in identifying violations of the securities laws and prosecuting violators. However, none of these organizations is authorized to provide legal representation to individual investors or to get your money back for you.

Obtain information on using arbitration to resolve your dispute by contacting FINRA, New York Stock Exchange, Municipal Securities Rulemaking Board, and Chicago Board Options Exchange. Each of these organizations operates a forum to resolve disputes between brokerage firms and their customers. You may also wish to consult an attorney knowledgeable about securities laws. Your local bar association can assist you in locating a securities attorney.

Securities Regulators To Contact

U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Office of Investor Education and Advocacy
Online Complaint Form

North American Securities Administrators Association, Inc.
Suite 710
10 G Street, NE
Washington, DC 20002
(202) 737-0900

Each state has its own securities regulator. You can find your regulator at the website of the North American Securities Administrators Association.

American Stock Exchange, Inc.
86 Trinity Place
New York, New York 10006
(212) 306-1452

Boston Stock Exchange, Inc.
One Boston Place
Boston, MA 02108
(617) 723-9500

Chicago Board Options Exchange, Inc.
400 LaSalle Street
Chicago, IL 60605
(312) 786-7705

Chicago Stock Exchange, Inc.
400 LaSalle Street
Chicago, IL 60605
(312) 663-2222

International Securities Exchange
60 Broad Street
New York, NY 10004
(212) 943-2400

Municipal Securities Rulemaking Board
1818 N Street, NW
Washington, DC 20036
(202) 223-9347

National Stock Exchange
440 South LaSalle Street
Suite 2600
Chicago, IL 60605
(312) 786-8803

The Nasdaq Stock Market LLC
One Liberty Plaza
165 Broadway
New York, NY 10006

Financial Industry Regulatory Authority
1735 K Street, NW
Washington, DC 20006
(202) 728-8000

New York Stock Exchange, Inc.
11 Wall Street
New York, NY 10005
(212) 656-3000

NYSE Arca, Inc.
11 Wall Street
New York, NY 10005
(212) 656-3000

Philadelphia Stock Exchange, Inc.
1900 Market Street
Philadelphia, PA 19103
(215) 496-5000

We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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