Broker dealer contracts: caveats and pitfalls.

• Author: Larson, M. Corinne
• Position: Securities contracts

Public investment officials may find some unfamiliar or unclear language in future broker/dealer contracts when they review them carefully. Some brokerage firms have amended their standard contracts to include language that dilutes safeguards for investors. Specifically, some investors have received delivery-versus-payment agreements that may be better suited for retail clients than for institutional clients. These agreements include the following provision:

The client agrees to instruct its agent bank to receive or deliver against the amount shown on the original trade confirmation unless any discrepancy in money amount exceeds 2 percent of the total money involved in that delivery.

By agreeing to this provision, the investor has instructed the bank to release funds or securities for investment transactions that may differ from the original agreed-upon trade by as much as 2 percent. This type of agreement is generally found in retail contracts, where a 2 percent discrepancy may not warrant holding up an investment transaction. A 2 percent discrepancy in a $1,000 transaction, for example, would amount to $20. For an institutional investor, on the other hand, a 2 percent discrepancy in a $1 million investment would amount to $20,000 and would warrant delaying the transaction until the discrepancy could be resolved. In a delivery-versus-payment (DVP) transaction, a bank will return cash or securities to the counterparty if the wireable securities or cash do not match the investor's instructions exactly.

Predispute agreements, which recently have emerged in some client opening-account agreements, are also a matter for public investors to be aware of. These clauses require investors to waive their right to seek remedies in court and instead agree to arbitration proceedings to settle disputes. Information from the Arbitration Division of National Association of Securities Dealers (NASD) indicates that predispute agreements spelling out what will happen in case a dispute arises are a common practice in many industries. Examples of predispute language follow:

* Arbitration is final and binding on the parties.

* The parties are waiving their right to seek remedies in court, including the right to jury trial.

* Pre-arbitration discovery is generally more limited than and different from court proceedings.

* The arbitrators' award is not required to include factual findings or legal reasoning, and any party's right to appeal or to seek modification of...