Protecting Your Stock Holding From Broker Abuses and Getting Redress When You Have to
An Acceler8now.com Investing Education Resource July, 2007
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If every stockbroker was a saint, this subject wouldn't arise. Well, the fold of stockbrokers is peopled by human beings and in the midst of a sizeable crowd, you are bound to find bad apples. Indeed, keeping stockbrokers from misapplying investors' stock-holdings has been a running battle, if you like, with the regulators introducing various measures to stem abuses. See pending cases with the SEC. The highly contentious trade alert system was one such measure. Also disciplinary measures, extending in some cases to prosecution, have been handed out from time to time. So, as you can see, there is need for vigilance, and that's what this write-up is about. What measures do you apply to forestall abuses, especially authorised sale of your shares? And if something goes wrong, where do you pursue a remedy?
Measures to Protect Your Investment
- Be Alert and Monitor
Common sense. You need proper record of your transactions, however you want to keep it (manual register, MS Excel, investment management software, etc). Also, documentation of your orders to your broker is important and you obviously need good files to put in relevant documents. You need your statements: account with your broker and your CSCS account(s). Reconciliations at set intervals should be an abiding commitment. This includes tracking your dividends and bonus shares which may fail to come. The registrar could be a problem too, you see?
- Cross-check, When in Doubt
You don't only lose money when your stock is fraudulently sold, you could lose money (that you shouldn't) in every transaction. This is understandable: it's not every stockbroker that could get to the extreme of converting your stocks, but does that mean some more can't take advantage, via sharp practices, in transactions they execute for you? Like not advising the correct day of the transaction if prices have moved higher after the purchase and so billing you at the higher rate. Or, with price moving to various levels in a day, choosing the price that gives him the best advantage, against your interest. There may be a limit to which you can track some of these, but note that the transaction records are always available at the CSCS. If in doubt and think you've been cheated, cross-check. The reports don't cost much.
- Consider a Special Account or Trade Alert
Go further, if you can, to take any of these services designed primarily to prevent unauthorised sales. They don't cost too much, if you consider the potential danger. Even the cost of packaging your report, when you have a problem, is possibly going to procure one of these services.
Where to Go When in Trouble
Okay, the harm is already done, your shares gone? Maybe not a sale but some dispute about a transaction? If you have a good case, then the regulators are there to listen and ensure equity. Where do you start?
- Try Resolving With Your Stockbroker
That's a reasonable way to go: if there was a genuine error, your broker is likely to act quickly to restore your position or provide other remedy as appropriate. Even when he acted deliberately, unless he is obstinate, he will move to sort you out, now that you have found out, to avoid further escalation. If this fails, you obviously have a challenge to pursue.
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- The Nigerian Stock Exchange/SEC
The NSE has a complaints/dispute resolution unit which works to settle disputes between parties in the market. This is a cost-free, but still authoritative platform that can settle matters, if parties can reach a resolution.
If a peaceful resolution fails, you have to consider a more formal complaint that
gets copied to the Securities and Exchange Commission. The SEC has an Administrative Proceedings Committee, a quasi-judicial body that adjudicates on operational irregularities. Here, the matter has assumed a more formal and in fact judicial dimension, with parties having a right to legal representation. Before you go this far, be sure you have a solid case.
- Investments and Securities Tribunal
This is where appeals go if a party is not satisfied with the outcome of the procedure at the SEC's Administrative Proceedings Committee. So, you have another layer of protection at this level, should there be need for it.
Those, in a nutshell, are some options for pursuing redress. This is not to advocate litigation, which is an expensive process. A peaceful resolution, where possible, will always be preferred. However, if a situation arises that leaves no other option, you probably have to take the bitter pill, than let your money go, just like that.
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