Stockbrokers and brokerage firms owe a duty of care and loyalty to their customers. The broker must use the standard of care and diligence needed to protect the customer’s interest. Failure to fulfill that duty may constitute negligence or malpractice by a broker. The duty of loyalty requires that the broker refrain from self-dealing and place the interests of the customer first. A source for tension and potential for conflict of interest may arise given the brokers’ typical method of compensation through commissions on sales. This may tempt some brokers to overtrade or churn the account to generate commissions.
A broker also has a duty to follow the instructions of the customer and to execute orders promptly at the best available price. Unless the customer has given the broker written, discretionary authority over the account, the broker may trade only after receiving prior authorization from the customer. The stockbroker has a duty to disclose all material facts relating to proposed investments and not to make any misrepresentations. In particular, a broker has a duty to disclose the risks of any proposed investment. A broker has a responsibility to learn about the customer’s profile and the investments being recommended, and to only recommend securities which are suitable for the particular customer in light of the customer’s investment objectives, financial circumstances, level of sophistication, and risk tolerance. A brokerage firm also has a duty to reasonably supervise their brokers in order to enforce compliance with securities laws and to prevent violations.