Negligence In The Context Of A Broker-Dealer Dispute With A Customer
The first element of negligence is the existence of a duty on the party of the defendant or respondent. As an example, in a dispute between a broker/dealer and client, there are general duties created by the type of account that the client establishes. Generally, there are three separate and distinct types of account relationships that a client may establish with the broker-dealer. They are identified as a discretionary account, nondiscretionary account or hybrid account.
By far, the most frequent type of account is the nondiscretionary account. In a nondiscretionary account, it has been stated that the duties owed to the client, by the broker-dealer, are (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, and (6) the duty to transact business only after receiving prior authorization from the customer.
In a purely discretionary account (where the account executive or broker-dealer has been granted limited discretion to trade the account), courts have determined that a brokerage firm and account executive owe a much broader fiduciary responsibility to the customer. These duties are: (1) to manage the account in a manner directly comporting with the needs and objectives of the customer as stated in the authorization papers or as is 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 responsibly to protect those interests, (3) keep his customer informed as to each completed transaction, and (4) 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 chic 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, he has an affirmative duty to explain the consequence of his actions to his customer. This explanation should include a discussion of the effect of active trading upon broker commissions and customer profits.
After reading the above descriptions of and the duties associated with a nondiscretionary verses a discretionary account, the duties owed to the customer seem straight forward; but, as in life, nothing is that simple. First, most clients believe that the duties owed to them by a brokerage firm more closely resemble those associated with a discretionary account. What usually gives the customer this belief is that their relationship and consequently the duties owed by a brokerage firm and/or account executive usually is unique. On the other hand, the brokerage firms consistently put forth the position that their responsibilities more closely resemble the duties associated with a nondiscretionary account. It is up to the customer to convince the panel or jury that his or hers position is correct so their change of success is enhanced. This is accomplished by experienced counsel
The uniqueness of this relationship has been recognized by the law. The evidence presented by the parties on this issue usually controls. The question is did the customer reasonably entrust matters to and did the brokerage firm provide services that exceeded the bounds ordinarily associated with a nondiscretionary account. There are any number of factual scenarios that many times exist between a client and a brokerage firm from which this can be inferred. Again, it is usually left up to experienced counsel to identify these issues for the client.
In furtherance of this discussion relating to the uniqueness that many times exist between a customer and a broker, one of the concepts that the courts have fashioned is the hybrid account. This type of account is one in which the broker has usurped actual control over a technically nondiscretionary 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. There are many reasons too numerous to explain, why this greatly benefits the customer.
Once the facts underlying the relationship between the customer and the broker, including expert testimony, have been presented to the panel or jury, on a negligence claim, the overriding issue becomes did the broker fail in its dealings with the customer to exercise the degree of care of a reasonably prudent and diligent broker under the same circumstances. The duty of care, by its nature, is both more expansive and more imprecise. Unlike contractual or fiduciary obligations, the duty of due care arises not by agreements or imposition of the parties governing their relations, but by the operation of law. The duty emerges out of a totality of given circumstances and holds the defendant or respondent in an action to a standard of conduct designed to protect persons located with a reasonable zone of foreseeability who were injured by the defendants careless behavior. It is not up to the client to prove this. It is the lawyer that must attempt to elicit facts to support the claims of the customer. The lawyer asks the questions and presents the evidence. For as one court noted “as a mirror of life, the spirit of the law is also adaptive. It reflects shades and contours that vary so as to accommodate, in addition to the generalized, the shapes and shadows of the exceptional moment.”
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