Breach of Promise/Contract
When promises are made and consideration paid (or if the person promised reasonably relies on the promise and takes action) a contract is formed. Contracts can be written, oral or even implied by the actions of the parties. While oral and implied contracts are more difficult to prove, legal action can be taken when such contracts are breached.
If an investor opens an account with a financial firm and is led to believe his or her account will be handled in a certain manner, a contract therefore exists between the financial firm and the client. When the account is not handled as promised and losses occur, the investor can consider legal action.
When most investment accounts are opened a new account agreement is almost always signed. This agreement usually exists in addition to promises made to the clients. Most claims against brokers and other investment advisors involve breach of both written agreements and oral promises.
Regulation of the securities industry is delegated by the Securities Exchange Commission (SEC) to self-regulatory organizations (SROs), primarily the National Association of Securities Dealers, Inc. (NASD). The NASD and other SROs have rules and regulations designed to protect investors. Brokers and their firms must enter into contracts with the NASD and other SROs to become registered representatives and member firms. Investors are the intended third-party beneficiaries of these contracts with the regulators.
Additionally, under the "shingle theory" cases have determined that when a brokerage firm "hangs its shingle" it has a duty to investors to follow the rules and regulations of the securities industry.