It may seem self-evident that a broker has a duty not to misrepresent a "material" fact to a customer and not to omit to disclose a material fact to the customer. A material fact is one that a reasonable person would consider important in deciding whether or not to invest. Yet misrepresentation is an element in most if not all securities arbitration claims.

While broker misrepresentations vary, perhaps the most common case involves a broker's misrepresentation that an investment or portfolio of investments is suitable for the customer's investment objective and risk tolerance - when, in fact, it is not. A material misrepresentation may be intentional or negligent. Either is a ground for recovery if financial losses resulted from a customer's justifiable reliance on the misrepresentation.

Similarly, a material omission (or silence) regarding a fact that the broker is under a duty to disclose provides a ground for recovery of financial losses resulting from a customer's justifiable reliance on the absence of disclosure. One example of such an omission is commonly called a "half-truth" - in other words, the broker tells a story but it is not the whole story. If "the rest of the story" is "material," it cannot be lawfully omitted. Thus, a failure to disclose the risks of a particular investment would be a material omission that, if justifiably relied upon, would entitle a customer to recover losses attributable to the omission.