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Security Recommendations and the Liability of Broker-Dealers

May 1, 2016

Matthew L. Kozora

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​I investigate the liabilities of broker-dealers from the arbitration of investor claims relating to security recommendations. I find that investor awards are more positive for claims involving securities that are more difficult to evaluate, and that the more positive awards relate to investor assertions of a fiduciary duty violation and to investor assertions of a suitability violation. I also find that the length of the arbitration, a measure of the cost of arbitration and a proxy for the potential difficulty of the two parties to directly settle the dispute, are greater for these claims. Overall, the results indicate that broker-dealers can have additional liabilities when recommending securities that are more difficult to evaluate. The results illustrate the importance of the applicable laws, including arbitration as a forum for dispute resolution, as a determinant of the liabilities or potential costs of broker-dealers to provide security recommendations


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