Security Recommendations and the Liabilities of Broker-Dealers
43 Pages Posted: 8 Jun 2016 Last revised: 20 Feb 2023
Date Written: May 1, 2016
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.
Keywords: Broker-Dealers, Investment Advisers, Arbitration, Fiduciary Duty, Suitability, Disclosure
JEL Classification: G20, G28
Suggested Citation: Suggested Citation