Journal of Law, Finance, and Accounting > Vol 2 > Issue 2

Security Recommendations and the Liabilities of Broker-Dealers

Matthew L. Kozora, U.S. Securities and Exchange Commission, USA, matthewkozora@gmail.com
 
Suggested Citation
Matthew L. Kozora (2017), "Security Recommendations and the Liabilities of Broker-Dealers", Journal of Law, Finance, and Accounting: Vol. 2: No. 2, pp 385-428. http://dx.doi.org/10.1561/108.00000021

Published: 06 Nov 2017
© 2017 M. L. Kozora
 
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In this article:
1. Introduction
2. Background and Variable Specification
3. Sample and Description of Arbitration Outcomes and Claims
4. Full Sample Tests
5. Subsample Tests
6. Subsample Tests
References

Abstract

I investigate the liabilities of broker-dealers when providing security recommendations from the arbitration of investor claims. I classify the securities at issue as either opaque or non-opaque depending on the difficulty to evaluate the securities and therefore the potential for investor harm. I find that investor awards are more positive for claims involving opaque securities, 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 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 opaque securities. The results illustrate the potential significance of the securities regulatory regimes as a determinant of investment advice.

DOI:10.1561/108.00000021