By Chad M. Kohler
Brokerage firms are required to monitor investment accounts to help protect customers against harmful activity such as unsuitable trading, churning, and over-concentrated positions.
But when possible improper activity is flagged, all too often brokerage firms' first step is to try to insulate themselves from any legal responsibility. They do this by sending a "happiness letter" to the customer.
If you get such a letter from your brokerage firm – so named because they're designed to get you to acknowledge that you're satisfied with what is going on in your investment account – then there is a good chance that something is seriously wrong. You need to take immediate steps to protect your rights as an investor.
Happiness letters typically come from a branch manager or compliance officer, not your individual broker or financial advisor. They begin with a seemingly bland note of thanks for being a valued customer. This language is designed to lull you into thinking that nothing is wrong. The letter then will probably mention the results of a periodic, routine review of the activity in your account.
From there it might proceed with a lot of industry jargon that is confusing to most customers and even those who work in the securities industry. The letter typically concludes with another note of thanks and a request that you kindly sign and return the letter to the brokerage firm.
Most investors make the mistake of throwing these letters away after reading them, or worse, they sign and mail them back to the firm. By doing so, you're probably unwittingly giving the brokerage firm cover for its own misconduct.
Don't make that mistake.
Instead, protect yourself by promptly contacting the supervisor who sent the letter and ask to see the compliance report that prompted it. Be careful, however, when speaking with the supervisor not to discuss anything else. Supervisors are trained to deal with these calls by asking questions seeking to establish how satisfied you are with your account's performance. Even seemingly innocuous comments by a customer will be entered into a supervision log and later can be twisted by the brokerage firm's lawyers to their advantage.
Many investors make the mistake of calling their broker instead. Do NOT speak to your broker about the letter. I've seen many cases where customers do this and are tricked into thinking that everything is okay. Remember, if you've received a happiness letter, there's a good chance that something is seriously wrong. Don't give your broker the opportunity to talk you out of protecting yourself.
Finally, gather all the information you have about your investment account (including monthly account statements and trade confirmations) and get an opinion from an attorney with significant securities arbitration experience.
Taking these important steps is critical in limiting potential losses in your investment accounts and protecting your legal rights.