Common Stocks, Preferred Stocks, Corporate Bonds, Municipal Bonds, Promissory Notes, Exchange-Traded Funds (ETF’s), and Mutual Funds – South Florida Securities and Investment Fraud, Negligence and Breach of Fiduciary Duty FINRA Arbitration and Litigation Attorney:
The elements of a breach of fiduciary duty action are (1) the existence of a fiduciary duty and (2) the breach of that duty that was the proximate cause of the plaintiff’s damages. A fiduciary relationship exists when confidence is reposed by one party and trust accepted by the other. Such a relationship exists where confidence is reposed on one side and there is resulting superiority and influence on the other. When a fiduciary relationship has not been created by an express agreement, the question of whether the relationship exists generally depends upon the specific facts and circumstances surrounding the relationship of the parties in a transaction in which they are involved.
The law is clear that a broker owes a fiduciary duty of care and loyalty to a securities investor. The type and extent of this duty is fact specific. In other words, your relationship with, in the case, your broker/dealer and/or account executive will be determinative of the type of duty that you are owed. However, please keep in mind that the extent of this duty is organic. It is constantly changing. It is for this reason that your specific circumstances need to be reviewed by a qualified professional.
Fiduciary duties associated with a non-discretionary account. A non-discretionary account is an account in which the customer rather than the broker determines which purchases and sales to make. In a non-discretionary account each transaction is viewed singly. In such cases the broker is bound to act in the customer’s interest when transacting business for the account; however, all duties to the customer cease when the transaction is closed. The duties associated with a non-discretionary account include, but may not necessarily limited to: (1) the duty to recommend a stock only after studying it sufficiently to become informed as to its nature, price and financial prognosis; (2) the duty to carry out the customer’s orders promptly in a manner best suited to serve the customer’s interests; (3) the duty to inform the customer of the risks involved in purchasing or selling a particular security; (4) the duty to refrain from self-dealing or refusing to disclose any personal interest the broker may have in a particular recommended security; (5) the duty not to misrepresent any fact material to the transaction; and (6) the duty to transact business only after receiving prior authorization from the customer.
Of course the precise manner in which a broker performs these duties will depend to some degree upon the intelligence and personality of his customer. For example, where the customer is uneducated or generally unsophisticated with regard to financial matters, the broker will have to define the potential risks of a particular transaction carefully and cautiously. Conversely, where a customer fully understands the dynamics of the stock market or is personally familiar with a security, the broker’s explanation of such risks may be merely perfunctory. In either case, however, the broker’s responsibility to his customer ceases when the transaction is complete. A broker has no continuing duty to keep abreast of financial information which may affect his customer’s portfolio or to inform his customer of developments which could influence his investments. Although a good broker may choose to perform these services for his customers, he is under no legal obligation to do so.
Absent from the above list is the duty, on the part of the broker, to engage in a particular course of trading. So long as a broker performs the transactional duties outlined above, he and his customer may embark upon a course of heavy trading in speculative stocks or in-out trading as well as upon a course of conservative investment in blue chip securities.
Unlike the broker who handles a non-discretionary account, the broker handling a discretionary account becomes the fiduciary of his customer in a broad sense. Such a broker, while not needing prior authorization for each transaction, must (1) manage the account in a manner directly comporting with the needs and objectives of the customer as stated in the authorization papers or as apparent from the customer’s investment and trading history; (2) keep informed regarding the changes in the market which affect his customer’s interest and act responsively to protect those interests; (3) keep his customer informed as to each completed transaction; and (5) explain forthrightly the practical impact and potential risks of the course of dealing in which the broker is engaged.
Although no particular type of trading is required of brokers handling discretionary accounts, most concentrate on conservative investments with few trades usually in blue chip growth stocks. Where a broker engages in more active trading, particularly where such trading deviates from the customer’s stated investment goals or is more risky than the average customer would prefer, the broker has an affirmative duty to explain the possible consequences of his actions to his customer. This explanation should include a discussion of the effect of active trading upon broker commissions and customer profits.
Between the purely non-discretionary account and the purely discretionary account there is a hybrid-type account which usually exists between most customers and their broker. Such an account is one in which the broker has usurped actual control over a technically non-discretionary account. In such cases the courts have held that the broker owes his customer the same fiduciary duties as he would have had the account been discretionary from the moment of its creation.
In Hecht v. Harris, 430 F.2d 1202 (9th Cir. 1970), the plaintiff, a 77 year old widow, opened a non-discretionary account with a major brokerage firm. Consistent with the practice in such accounts plaintiff received confirmation slips of each transaction and monthly statements on the status of her account. In addition, she spoke personally with the defendant broker several times a week. Nonetheless, the court held that the broker was liable to plaintiff for churning her account on the ground that he had traded excessively without informing plaintiff of the potential hazards involved in such a course of trading. Since the plaintiff was informed, for the most part, of the individual transactions in her account, the court’s holding assumed that the defendant owed plaintiff the additional fiduciary duty to explain the risks of pursuing a particular course of trading. That assumption derived from the court’s finding that the broker had taken full control over the plaintiff’s account and thus owed her those fiduciary duties normally associated with discretionary accounts.
In determining whether a broker has assumed control of a non-discretionary account the courts weigh several factors. First, the courts examine the age, education, intelligence and investment experience of the customer. Where the customer is particularly young, old, or naive with regard to financial matters, the courts are likely to find that the broker assumed control over the account. Second, if the broker is socially or personally involved with the customer, the courts are likely to conclude that the customer relinquished control because of the relationship of trust and confidence. Conversely, where the relationship between the broker and the customer is an arms-length business relationship, the courts are inclined to find that the customer retained control over the account. Third, if many of the transactions occurred without the customer’s prior approval, the courts will often interpret this as a serious usurpation of control by the broker. Fourth, if the customer and the broker speak frequently with each other regarding the status of the account or the prudence of a particular transaction, the courts will usually find that the customer, by maintaining such active interest in the account, thereby maintained control over it.
Importantly, the category which you fall in is not something that you should try to figure out yourself. You should attempt to make this determination in conjunction with a qualified professional.
Please keep in mind that the above information is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as providing legal or investment advice. If you have any questions concerning this post, you should contact a qualified professional.
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.
At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.