This updated guide explains common types of stock broker misconduct (unsuitability, overconcentration, churning, unauthorized trading, and misrepresentation), notes the regulatory context since Regulation Best Interest (Reg BI) and the difference between broker standards and fiduciary duty, lists red flags to watch for, and outlines steps to document, report, and pursue recovery through firm compliance, FINRA/SEC/state regulators, arbitration, or legal counsel.

Why investors should know broker misconduct

Working with a broker or advisor can simplify investing, but it does not replace investor vigilance. Most investment losses come from market moves, not fraud. Still, brokers and advisers can engage in misconduct - sometimes by acting negligently, sometimes intentionally. Knowing the common types of broker fraud helps you spot problems early and protect your savings.

Common types of broker or adviser misconduct

Unsuitability

A broker must understand your financial situation, goals, time horizon, and risk tolerance before recommending products. Placing you in investments that don't match your profile - for example, selling aggressive, illiquid securities to a retiree - can be an unsuitability claim.

Overconcentration

Failing to diversify a portfolio leaves you exposed to a single company, sector, or asset class. Advisers should recommend diversification appropriate to your goals and risk profile; concentrating savings in a handful of high-risk positions is a red flag.

Churning (excessive trading)

Churning is excessive buying and selling to generate commissions, not to serve your interests. Signs include unusually high trade volume, frequent in-and-out trades of the same securities, and rising costs that erode returns.

Unauthorized trading

Trades executed in your account without your permission are unauthorized. Brokers need your consent before most transactions; unauthorized trades can be grounds for restitution.

Misrepresentation or omission

This includes false statements or leaving out material facts about an investment's risks, fees, or conflicts of interest. Modern examples include misleading claims about speculative products such as certain derivatives, SPACs, or crypto offerings.

Updated context (2020s)

Since 2020, the Securities and Exchange Commission's Regulation Best Interest (Reg BI) requires broker-dealers to act in a customer's best interest when recommending securities, though it differs from the fiduciary duty that registered investment advisers (RIAs) owe their clients. Many investors now also use fee-based RIAs and robo-advisors; each model has different incentives and standards.

How to spot red flags

Watch for frequent trade confirmations, unexplained account changes, pressure to buy complex products, high commissions, or evasive answers about risk and fees. Use FINRA's BrokerCheck and the SEC's investor tools to review a broker's disciplinary history.

What to do if you suspect fraud

  1. Preserve records: account statements, trade confirmations, emails, and notes from conversations.
  1. Contact the firm's compliance department in writing and request an explanation.
  1. File complaints with FINRA, the SEC's Office of Investor Education and Advocacy, and your state securities regulator (NASAA provides links). FINRA also offers arbitration and mediation for disputes.
  1. Consider consulting a securities attorney to evaluate claims and potential remedies (arbitration, civil suit, or regulatory complaints).
Act quickly: recovery options and deadlines vary. Early documentation improves your chance of resolution.

FAQs about Stock Broker Fraud

What's the difference between a broker's "suitability" standard and a fiduciary duty?
Brokers historically must make recommendations that are suitable for a client's profile; registered investment advisers (RIAs) owe a fiduciary duty to act in the client's best interest. Since 2020, Reg BI requires broker-dealers to act in clients' best interest for recommendations, but it is not identical to the fiduciary standard RIAs follow.
How can I check a broker’s background?
Use FINRA's BrokerCheck to review a broker's employment history and disciplinary record. The SEC's Investor.gov and your state securities regulator also provide complaint information and investor resources.
What if my broker traded without my permission?
Document the trades and contact the firm's compliance department in writing. File complaints with FINRA and your state regulator, and consider speaking with a securities attorney - unauthorized trading can be a basis for restitution.
How do I know if my account is being churned?
Look for unusually high turnover, frequent small trades that generate commissions, rising fees that reduce returns, and patterns of in-and-out trading without a clear investment rationale.
What steps should I take immediately if I suspect misconduct?
Preserve all statements and communications, request an explanation from the firm's compliance department, file complaints with FINRA/SEC/state regulators, and consult a securities lawyer to assess arbitration or legal options.