As an attorney who, over the years, has represented many individuals with complaints against their stockbrokers or brokerage firms, I have been fascinated by the fact that one of the key documents in virtually every single case is one that the customer usually has never seen.

It is called the Customer New Account Form. The forms are not uniform, as each brokerage firm designs their own. The form contains an array of personal information about you -- your age, occupation, marital status, number of dependents, annual income, liquid assets, risk capital, net worth, investment objectives, and your previous investment experience. These forms must be filled out at the time you open any brokerage account or before you purchase any one time investment through a brokerage firm.

Have a brokerage account and don’t know what your form says? Most brokerage firms do not require that these forms be filled out by customers, reviewed by customers, or even mailed to customers. Therefore, it would not be uncommon for you to be unaware of the form or have a copy of it. The broker is supposed to fill out the form based on conversations with you, and you would never have reason to see it -- unless you assert a claim about something that went awry in the handling of your account. In that instance, the New Account Form may take on a new use -- as a defensive shield to your claim.

Uses of the New Account Form

One of the primary purposes of the New Account Form is to provide a tool for brokerage firm management to monitor your account. In an earlier article I wrote of the onus on stockbrokers to learn essential facts about you before recommending an investment. This is referred to as the "Know Your Customer" rule. Many of these essential facts are recorded on the New Account Form. At the inception of your account, your broker’s branch office manager is required to sign off on the New Account Form. At that time, any "red flags" should be detected, like an 80 year old customer with an income of $15,000 wanting to invest $10,000 for trading profits. Also, throughout the life of your account, your broker’s manager is supposed to occasionally review the New Account Form to ensure that investments purchased in your account and the rate at which investments are being purchased are suitable for you, given your investment objectives.

Maybe it’s because most of the forms I see, I see because there is some sort of problem, but I have rarely seen a New Account Form that was filled out completely properly. The form said the customer had an L.L.M. degree, when he really had a J.D. degree; the customer’s age or other portions were left blank; the annual income was overstated; or the investment objective was wrong. Errors on the form may be the result of customer ego (the customer who overstates his net worth) or broker negligence or malfeasance.

Brokers have an incentive to bump up the numbers on the New Account Forms -- doing so makes customers seem wealthier or more financially sophisticated than they may really be. This is a benefit to brokerage firms when defending claims brought by customers. For example, one New Account Form stated, "No. Years in Stocks and Bonds ____" The broker had put "10" in the blank; however, the customer explained later that what he told the broker was that his only investment experience was 10 years earlier when he purchased $1,000 of IBM stock. At the hearing, the brokerage firm defended the claim by pointing to the "purported" 10 year's investment experience -- in order to show that the broker had reason to believe the customer understood the risks of the market.

Ask for it

Whether you are already doing business with a brokerage firm or you are opening a new brokerage account, ask for a copy of your New Account Form. Ensure that it is correct by either reviewing it in detail or assisting your broker in filling it out. If your broker has or attempts to inflate any of the information you have given him or the form, ask for an explanation. Consider that you may be dealing with a broker that is more concerned about protecting himself than looking out for your best interests.

Keep a copy of the New Account Form and over time, advise your broker of material changes with respect to any of the information on it. Realize that the New Account Form is merely a guide for the broker; under the Know Your Customer Rule, your broker is required to elicit other information from you for which there are no neat spaces or boxes on the form (there usually is a space for "Additional Comments" though). Just because you have invested for 10 years doesn’t necessarily mean that you have an understanding of how the securities markets work or how commissions are structured. Does your broker know whether or not your stated investment objective applies to all of the money you seek to invest or only part of it? If you are older, you should be asked when you when you plan to retire.

If your current broker or any new broker is not asking questions beyond the New Account Form or if you discover that your form is dramatically incorrect or inflated, you may have a problem. Asking such questions and accurately recording the answers is not only the only way that a broker can make suitable recommendations for you; it’s the law.