Journal of Law, Finance, and Accounting > Vol 2 > Issue 2

Security Recommendations and the Liabilities of Broker-Dealers

Matthew L. Kozora, U.S. Securities and Exchange Commission, USA,
Suggested Citation
Matthew L. Kozora (2017), "Security Recommendations and the Liabilities of Broker-Dealers", Journal of Law, Finance, and Accounting: Vol. 2: No. 2, pp 385-428.

Publication Date: 06 Nov 2017
© 2017 M. L. Kozora


Login to download a free copy
In this article:
1. Introduction 
2. Background and Variable Specification 
3. Sample and Description of Arbitration Outcomes and Claims 
4. Full Sample Tests 
5. Subsample Tests 
6. Subsample Tests 


I investigate the liabilities of broker-dealers when providing security recommendations from the arbitration of investor claims. I classify the securities at issue as either opaque or non-opaque depending on the difficulty to evaluate the securities and therefore the potential for investor harm. I find that investor awards are more positive for claims involving opaque securities, and that the more positive awards relate to investor assertions of a fiduciary duty violation and to investor assertions of a suitability violation. I also find that the length of the arbitration, a measure of the cost of arbitration and a proxy for the difficulty of the two parties to directly settle the dispute, are greater for these claims. Overall, the results indicate that broker-dealers can have additional liabilities when recommending opaque securities. The results illustrate the potential significance of the securities regulatory regimes as a determinant of investment advice.