Breach of Fiduciary Duty

Fiduciary duties arise in many different contexts within the securities industry. A fiduciary duty is said to exist in all circumstances where trust and confidence is placed in another. A fiduciary duty can also arise from a written agreement that empowers an advisor to act as the investor’s agent. The existence and scope of the duty varies depending upon the nature of the relationship between the investor and the party being accused of the breach of fiduciary duty. Primarily, the following individuals and companies are subject to fiduciary duties:

• Brokers
• Investment Advisers
• Investment Companies and Public Companies

Fiduciary Duties – Brokers

When a broker recommends an investment to an investor, the broker has a duty to:

• Understand the nature of the investment’s risks, rewards, and strategy before recommending the investment;
• Make only suitable recommendations to the investor based upon the investor’s objectives, needs, and circumstances;
• Furnish information to the investor that would be material to the investor’s decision about the investment recommendation; and
• Not misrepresent or omit material information.

These fiduciary duties are “point of sale” duties. That is, each duty exists at the time the broker recommends a transaction to an investor. Generally, courts have found that a non-discretionary broker-investor relationship, without more, does not create a duty to continually furnish the client with information about the recommended transactions. However, courts impose ongoing fiduciary duties on brokers when:

• The investor is very young or old, has never employed a broker before or has very little general knowledge investment experience, and completely relies upon the expertise and knowledge of the broker. In these cases, it is assumed that the broker exercised a high degree of direction and control over the account’s investments;
• The broker and investor have been long-time friends and enjoy a social trust because the investor is relying upon the relationship in accepting the recommendations of the broker; or
• The broker assumes actual control over the account.

Fiduciary Duties – Investment Advisers

The primary difference between a broker and an investment advisor is that an investment advisor makes discretionary trades and has an ongoing fiduciary duty to their clients as a matter of course. An investment advisor has not only all the fiduciary duties of a broker, but duties under agency law as well.

Under agency law, investment advisers have a duty to warn and advise investors as market conditions change. An investment or strategy that may have been suitable years ago may no longer be suitable for the investor given changes in the market or the investor’s financial circumstances.

Additionally, investment advisers have a duty to act loyally, refrain from self-dealing, and fully disclose any conflicts of interest. This duty comes into play in many ways. Unlike a broker, an investment advisor typically does not act as a market maker, underwriter, distributor, or otherwise participate in the creation and marketing of securities to investors. Thus, investment advisers, in theory, act as independent investment appraisers and portfolio managers for their clients. Occasionally, investment advisers ignore their role as disinterested recommenders of securities and become involved in market-making and other manipulative activities. The conflict may be minor and, if properly disclosed, the investor can make an informed decision. However, the conflict may be so pervasive that the investment advisor cannot possibly render candid, disinterred advice.

The rules and regulations governing the conduct of investment advisers can be found in the Investment Advisers Act of 1940, codified at 15 U.S.C. § 80b-1 through 15 U.S.C. § 80b-21.

Fiduciary Duties - Investment Companies and Public Companies

Investment companies (including mutual funds), limited liability partnerships, and corporations all owe fiduciary duties to investors.

In a corporation, the board of directors is responsible for the management of the company’s business. In managing the business, directors typically act in a supervisory role and delegate day-to-day management to officers of the corporation. Directors and officers are fiduciaries of the stockholders of the company. Consequently, decisions made in furtherance of managing the business must be focused on the best interests of the stockholders. Moreover, if the company is a public company, meaning that the company is listed on the New York Stock Exchange (NYSE) or other public exchange, the Securities Exchange Act of 1934 codified at 15 U.S.C. § 78a et seq. provides additional regulation of the duties of corporate directors and officers.

A mutual fund’s investment advisor and the board of directors owe fiduciary duties to investors as well. Those duties include the duty of loyalty, care, and disclosure of material information and conflicts discussed above. A mutual fund’s directors employ an investment advisor, who selects securities for purchase and sale by the fund and is bound to act in accordance with the Investment Advisor Act. The mutual fund and the directors are also bound to act in accordance with the rules and regulations under the Investment Company Act, codified at 15 U.S.C. §§ 80a-1–80a-64. The attorneys at Gana Weinstein LLP have litigated breaches of fiduciary duties in state and federal court and throughout the country in arbitration. If you have questions about the contours of the law relating to fiduciary duties or believe you or someone you know may have a case, feel free to contact us.

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