Financial terms defined by the Financial Industry Regulatory Authority (FINRA)
Arbitration: A method where conflict between two or more parties is resolved by impartial persons – arbitrators – who are knowledgeable in the areas of controversy.
Arbitration is an efficient and less costly litigation procedure than going to Court. Most brokerage firms have binding arbitration clauses written into their customer agreements in connection with the resolution of customer complaints. Decisions of the Arbitrators are binding on all parties.
Arbitrator: A private, disinterested person chosen to decide disputes between parties
Asset allocation: A fundamental concept in portfolio management in which an investment adviser determines the investment profile for a client, including their risk tolerance and time horizon, then uses this information to split the client’s funds between appropriate classes of investment. As relative movements in the market for the various asset classes change the mix of assets in the portfolio over time, the adviser must rebalance the portfolio.
Blue Chip Stocks: Stocks of strong, well established corporations with a history of paying dividends in good and bad times.
Broker/Dealer: A brokerage firm.
Capital gain: A gain recognized when a security is purchased at one price and sold at a higher price. It does not include dividend or interest income.
Commodity Futures Trading Commission (CFTC): U.S. Government Agency that regulates U.S. exchange trading in futures.
Confirmation: A written report giving details of the trade to the customer or the other broker/dealer involved in the trade. Confirmations must be sent the next business day after the trade.
Discretionary Account: A customer account in which the firm or its registered representative as the authority to enter orders without the prior approval of the customer.
Diversification: Reducing risk by spreading investments among several markets and/or industry segments within a market. Diversification reduces the risk that an individual investment will perform worse than other investments in its same class.
Dividend: A payment of corporate earnings to shareholders. Dividends are normally paid in cash, but may also be in stock or property.
Excessive trading (or churning): A broker excessively trades an account for the purpose of increasing his or her commissions, rather than to further the customer’s investment goals.
Failure to execute: The failure of a broker to execute an order of his or her customer.
Individual investor: A person who buys or sells securities for his or her own account. The individual investor is also called a retail investor or retail shareholder
Individual Retirement Account (IRA): A pension plan allowing individuals to save for retirement while enjoying some of the tax advantages given to corporate pension plans.
Initial Public Offering (IPO): The initial sale of securities to the public.
Investment Adviser: In investment companies, the person or firm making the trading decisions. In other uses, a person or firm (i) providing investment advice for a fee; (ii) managing money for investors; or (iii) publishing investment newsletters for paid subscriptions.
Joint tenancy with right of survivorship (JTWROS): a type of ownership right. When one owner dies, his interest passes to his surviving co-tenants.
Long-term capital gains: Gains on assets held for more than 12 months. Usually qualify for lower tax rates short-term gains do.
Margin: The amount a client pays for a security purchase in a credit (or margin) account with a broker/dealer. Initial margins on purchases are set by the Federal Reserve Board. Minimum margin maintenance amounts are set by the stock exchanges.
Margin account: An account in which a customer may pay only part of the purchase price of securities.
Margin Agreement: The customer consent pledging his securities as collateral for a debit balance.
Margin call: In a margin account, the request for more equity to bring the account up to the minimum margin maintenance level. Margin calls can be met by depositing cash or stock.
Mediation: An informal, voluntary process used in securities industry disputes in which a mediator helps negotiate a mutually-acceptable resolution between disputing parties. If the parties cannot negotiate an acceptable settlement, they may still arbitrate or litigate their dispute.
Mediation is an opportunity to meet with the attorneys for the brokerage firm with an objective third party to see if the matter can be resolved without a formal arbitration or without going into court, thereby, avoiding additional litigation costs.
Misrepresentation: A false representation of a matter of fact that should have been disclosed, which deceives another so that he/she acts upon it to his/her injury.
Money market account: An account with a bank or broker/dealer where the funds are invested in short-term interest-bearing securities. Similar to checking accounts, except that they have limits on number of checks written per month and pay interest. Accounts with banks are insured by the FDIC.
Money market fund: A mutual fund whose assets are low risk, short-term money market instruments such as Treasury bills, commercial CDs, and commercial paper. Usually offer check-writing privileges.
Mutual fund: A pool of money invested by an investment company in a number of securities like stocks, bonds, or government securities. Each mutual fund is different in its make-up and philosophy. Because most mutual funds invest in a large number of securities, they offer investors the benefit of diversification, which can help reduce market risk.
Registered Representative: An employee of a broker/dealer that is a member of the NASD (now called FINRA) or a stock exchange who is registered with the SEC and performs the duties of an account executive.
Securities analyst: An individual who does investment research and makes recommendations to buy, sell, or hold. Most analysts specialize in a single industry or business sector.
Securities and Exchange Commission (SEC): The federal agency that regulates the securities markets and admisters federal securities laws.
Security: SEC definition includes: investment notes, stocks, treasury stocks, bonds, or debentures; certificates of interest or participation in a profit-sharing agreement or in oil, gas, or in other mineral royalty or lease, collateral-trust certificates or voting-trust certificates; investment contracts; certificates of deposit for one of the above; options, rights or warrants on one of the above or on any group or index of the above; or foreign currency options or rights. Commodity futures contracts or commodity options are not generally considered securities, but fall under the jurisdiction of the Commodities Futures Trading Commission. While whole life, term and universal life insurance are not considered securities, even though they may include some investment risk, variable life insurance is considered a security.
Unauthorized trading: The purchase, sale or trade of securities in an investor’s account without the investor’s prior authorization.
Unsuitability: A suitability violation occurs when and investment made by a broker is inconsistent with the investor’s objectives, and the broker knows or should know the investment is inappropriate.
A broker has a duty to learn the essential facts of a customer before he makes any recommendations. If a broker makes an unsuitable recommendation either because the recommendation is inconsistent with the investment objectives of the customer or the financial needs of the customer the broker and his company may be liable.
For example, a customer who wants a blue chip portfolio investing for long term growth who is given a series of speculative house stocks is getting unsuitable recommendations because there is too much risk for his investment objectives.
Litigation in all courts: Mark A. Tepper is admitted to practice in New York, Florida and California. He is also admitted to practice before the United States Supreme Court and the U.S. District Court for the Southern District of New York.