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Securities Division

Investor Education - Choosing Broker-Dealers and Agents

 

Investing in the stock market can be a complex business. The assistance of a good broker-dealer and agent can be an essential element in achieving success with investments and in the stock market.

An agent, also known as a registered representative, stockbroker, account executive, financial consultant, and securities salesperson, is an employee of a broker-dealer, also known as a brokerage firm. In most cases, both the broker-dealer and agent need to be registered with the state securities agency in each state in which they will be transacting business with customers.

 

The following information can greatly increase your chances of establishing and maintaining good relationships with broker-dealers and agents, which will increase the likelihood of the realization of your ultimate investment goals.

 

Definition of Broker-dealer: Pursuant to the Tennessee Securities Act of 1980 [T.C.A. 48-2-102(4)], broker-dealer means any person engaged in the business of effecting transactions in securities for the account of others, or any person engaged in the business of buying or selling securities issued by one (1) or more other persons for such person's own account and as part of a regular business rather than in connection with such person's investment activities.

Broker-dealer does not include:
(A) Issuers, except to the extent provided in § 48-2-110(f);
(B) An agent;
(C) An institutional investor;
(D) A person who has no place of business in this state and who is registered as a broker-dealer with the securities and exchange commission or the National Association of Securities Dealers if:
(i) The person effects transactions in this state exclusively with or through:
(a) The issuers of the securities involved in the transactions;
(b) Other broker-dealers; or
(c) Institutional investors; or
(ii) During any period of twelve (12) consecutive months, the person does not effect more than fifteen (15) transactions in securities from, in, or into this state (other than to persons specified in subdivision (4)(D)(i)); or
(E) Such other persons not within the intent of this subdivision (4) as the commissioner may by rule exempt from this definition as not in the public interest and necessary for the protection of investors.

 

Definition of Agent: Pursuant to the Tennessee Securities Act of 1980 [T.C.A. 48-2-102(3)], agent means any individual, other than a broker-dealer, who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities from, in, or into this state. A partner, officer, director, or manager of a broker-dealer, or a person occupying similar status or performing similar functions, is an agent only if such person otherwise comes within this definition or receives compensation specifically related to purchases or sales of securities from, in, or into this state. Agent does not include such other persons not within the intent of this subdivision as the commissioner may, by rule, exempt from this definition as not in the public interest and necessary for the protection of investors.

 

General Considerations: Before you invest, take the time to review your personal finances thoroughly. Decide upon investment goals and the amount of time you want funds invested after assessing all other personal obligations, including sufficient liquid assets. Understand your investment goals and satisfy your concerns regarding the safety of investment principal and return. Know the degree of risk you are willing to take. As a general rule, the greater the rate of return, the greater the risk.

 

Types of Broker-dealers: There are two general categories of broker-dealers: full-service broker-dealers and discount broker-dealers. A full-service firm and its agents recommend specific securities and give advice on securities to fit the investor's financial situation. A discount firm and its agents make securities purchases and sales at lower commissions, but generally do not provide specific securities advice. You should choose the type that suite your needs.

 

Services of the Agent: An agent of a broker-dealer offers many services to a client, including the following:

 

Knowing the Customer

To assist the investor, the agent needs to learn who the investor is, his financial condition, and the needs and investment goals of the investor. This information is obtained through interviews and completion of an account form providing personal data and investment experience and preferences. The agent must exercise due diligence to know the client so as to provide appropriate investment advice.

 

Keeping the Customer Informed

A prospectus or other necessary information about the security being considered for purchase must be furnished by the agent. The prospectus describes the business in which you are investing and how your money will be used. Read all information carefully before investing.

 

Purchasing and Confirming Securities Sales

The purchase or sale of securities is made by the agent of the broker-dealer. Notice of confirmation, with details of price, proceeds, and charges will be received in a few days after the transaction. If an investor requests delivery of a stock certificate, the stock certificate should arrive in a few weeks. The agent should make no transaction in an investor's account without the investor's approval. If this happens, the agent or the agent's supervisor should be notified at once upon learning of it, and cancellation should be requested of the transaction that was not approved.

 

Offering Special Accounts

Additional services may be available in special accounts that give the agent discretion to make trades for an investor without each trade being approved by the investor, know as discretionary accounts. Credit for the purchase of additional securities may also be provided by the use of margin accounts. Both types of accounts should be closely investigated and understood fully before using such services.

 

Insurance Protection

 

Most broker-dealers are members of the Securities Investor Protection Corporation (SIPC) which provides insurance for losses suffered in the event of financial difficulties and liquidation of a broker-dealer firm. SIPC is a quasi-governmental agency which provides each investor coverage up to $500,000 for loss of securities, which could include $100,000 for cash claims. This coverage does not extend to investor loss incurred from the loss in value of the securities that have been purchased, but from loss of cash or securities caused by the financial difficulties of the broker-dealer.

 

Tips for Choosing a Broker-dealer and an Agent

 

In selecting an agent, the following suggestions can be helpful:

  • Look for a well-trained specialist, as you would in the selection of an accountant of lawyer. Get recommendations from an accountant or lawyer, or persons who have had successful relationships with an agent.
  • Broker-dealers have pamphlets describing their services, the securities available and exchanges where traded, purchase recommendations, and the costs and commission charges. Make certain that the services provided can accommodate your investment objectives.
  • You should feel at ease with your agent because you will be providing personal information about your finances and investment goals. The agent should listen to your expectations and understand you needs. Based on the information provided, the agent can develop an investment strategy tailored to an investor's needs. Make sure you understand the investments that are recommended to you for purchase. A good agent takes the time to explain how and who any security purchase fits into your investment goals.

Working with the Agent

 

As investment decisions are made with the help and advice of your agent, keep these factors in mind:

  • It is your money being invested and you have the final decision of how and when the investment should or should not be made.
  • Read and understand the prospectus and other information given to you by your agent.
  • Know the industry or business whose security is being purchased and how it stands in its field. Learn its profit and dividend history and expected future operations.
  • What risks are involved? How does this security purchase help you reach your investment goals?
  • Any questions should be fully answered by your agent. Continue to make contact until answers are obtained. Do not approve the purchase until questions are satisfactorily answered.
  • Keep track of your investment through review of the quarterly and annual company report, and financial information in newspapers and periodicals. Review all confirmations and account statements you receive from the broker-dealer. Ask your agent to explain anything you might not understand or answer any questions you might have from you review.
  • If you have a problem with your account or agent, first contact the broker-dealer's office supervisor or manager and explain the problem. If the situation is not satisfactorily resolved, contact you state securities administrator. Additional investor education information is available through your state's securities agency or through NASAA at www.NASAA.org or 888-84NASAA.
How to Select a Stockbroker
  • Review your personal finances.
  • Determine your financial goals.
  • Know the risks you are willing to take.
  • Determine the type of broker-dealer that best suits your needs.
  • Interview a number of broker-dealers and agents.
  • Meet each agent in his office and ask the following questions:
    1. What is the agent's education and training background?
    2. How much experience does he have?
    3. What is his area of expertise?
    4. Does he have a track record that you can examine?
    5. How are the broker-dealer and agent compensated?
  • After the meeting evaluate:
  • Did the agent give clear and complete answers to your questions?
  • Did the agent explain any terms that you did not understand?
  • Did you feel comfortable with the agent?
  • Did you leave the meeting confident that you understood the topics of discussion?

If you answer "no" to any of these questions, move on to the next candidate.

 

Conduct a background check by:

  • Calling the Tennessee Securities Division at 615-741-2947 or 800-863-9117. The Division can tell you when the broker-dealer and/or agent were registered in Tennessee and whether the broker-dealer and/or agent have been the subject of any regulatory actions.
  • Contacting the National Association of Securities Dealers (NASD) at 800-289-9999. The NASD's website resources include the NASD Public Disclosure Program and the NASD Investor Complaint Center. The NASD is a self-regulatory agency of the securities industry, and most broker-dealers and agents registered throughout the United States are included in the database known as the Central Registration Depository (CRD). Information made available through the NASD’s Public Disclosure Program is derived from the CRD as reported on the industry registration forms, Form U-4 and Form BD. The Forms are approved by the Securities and Exchange Commission (SEC) and adopted by all self-regulatory and state securities regulators.

When working with a broker-dealer:

 

Remember it is your money being invested and you have the final decision regarding an investment.

  • Ask for and read the prospectus and other information that the agent gives you.
  • Ask questions until you understand all the information. Make sure you understand the risks involved and how this investment will help you reach your goals.