Why did my Brokerage Firm send me this letter?
If you have ever received a letter from your brokerage firm regarding the trading, or activity, in your account, you might have asked yourself, “why did my brokerage firm send me this letter?” These letters are called activity letters and most brokerage firms send them, including Morgan Stanley, Bank of America, Wells Fargo, Merrill Lynch, Citigroup (Smith Barney), and Ameriprise.
There are a couple of reasons the brokerage firms send activity letters. The first reason that a brokerage firm sends an “activity letter” is to provide a service to its clients. The brokerage firm wants to insure that the investor is aware of the trading in his/her account and that they understand the risks of such trading.
The “activity letter” is automatically generated by brokerage firms internal compliance departments to police the brokerage firms financial advisors and to insure that these advisors are acting within the scope of their authority and with the best interests of the client, you, in mind.
Unusual Trading in Account
If you received one of these letters, it is because the trading in your account was outside of normal trading thresholds and triggered a second look by the compliance department of your brokerage firm (in fact, you will often receive a follow up call from your brokerage firm’s compliance department after receiving one of these letters).
Often times the financial advisor will also call you either shortly before or after you receive an activity letters. This is typically done to minimize the impact that this letter may have on you. The financial advisor will often tell you that the activity letter is a standard letter and shouldn’t worry about it.
Although these letters are generated based on standard procedures, if you did receive an activity letter from your brokerage firm you should be asking yourself whether the trading in your account is appropriate for your investment objectives and why you received such a letter.
Brokerage Firm is Protecting itself
The second reason that brokerage firms send these letters is as a mechanism to attempt to minimize their litigation risk in the event that its financial advisors are acting inappropriately. The brokerage firm’s defense goes something like this…. “You received letters confirming the activity in your call account so you had knowledge that the trading in your account may be risky, so you must have assumed those risks by not putting a stop to the trading.” This is the reason that activity letters are often called “suicide letters.”
Brokerage firms commonly defend actions brought by investors by alleging that the investors claim is barred by the doctrines of waiver and estoppel, or, at a minimum, its liability is limited due to the mailing of these activity letters to their investor concerning the use of risky investments, churning, or other fraudulent behavior.
Such letters often require the investor to acknowledge their understanding of the manner in which their account was being handled by the brokerage firm and the financial advisor.
Passing the Blame
The brokerage firm’s intent, then, is to pass the blame on to the investor by claiming that the investor clearly understood the risks of the trading in his/her account because the investor acknowledged as such in writing (this presumes, of course, that the investor understood the disclosures in the letter, or that the financial advisor had not called the client and told them that the letter was nothing more than a record keeping formality, or other inconsequential piece of documentation for the client’s filed).
While the acknowledgement of the activity in an investor’s account does not in and of itself preclude that investor from later bringing a claim against his/her brokerage firm, investors should nonetheless be very leery of acknowledging any activity letters from their brokerage firm without fully understanding that acknowledgement.
The receipt of an activity letter also does not necessarily mean that the trading in your account was inappropriate, but it may be prudent to have a professional take a look at the trading to be safe.
If you have questions about an activity letter you received from your brokerage firm, The White Law Group may be able to help. To speak to a securities attorney, please call The White Law Group at 312/238-9650 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington. Our firm has handled more than 700 FINRA arbitration cases.
For more information on The White Law Group, please visit our website at whitesecuritieslaw.