Attorney and Shareholder at. Attorneys Robert Mitchell Sarah Deutsch Christopher Waznik Articles Legal Services Securities Litigation Real Estate Law Commercial Litigation Litigation FAQ Blog Contact Us Home. The Duty of a Brokerage Firm Analysis of the duty of a brokerage firm to monitor customer accounts and to recommend account changes.
Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time.
Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed. Securities brokers stand in a fiduciary relationship with their customers.
Shearson Hayden Stone, Inc. Such a fiduciary relationship is characterized as an affirmative duty to use the utmost good faith. This duty carries with it the duty to fully and fairly disclose all material facts. Capital Gains Research Bureau, Inc.
Agents, as a general rule, are fiduciaries of their principal. First Union Securities, Inc. Since stockbrokers are generally agents of the client, it necessarily follows that they are also fiduciaries. The fiduciary obligations securities brokers owe to clients are comparable to the fiduciary obligations corporate directors owe to shareholders.
See also Rupert v. Clayton , P.
Breach of Fiduciary Duties :: San Francisco Fiduciary Duty Lawyer Law Offices of Mark Anchor Albert and Associates
Bache Halsey Stuart Shields, Inc. See United States v. Dial , F. Bruff , 50 S.
Stockbroker Negligence & Malpractice Overview :: Justia
Eye , 50 S. Further, the broker maintained that he was not responsible for the losses incurred as a result of the numerous transactions on the account because the elderly investor controlled the account. The court rejected both of these defenses. Erdos the broker had a duty to act with caution and to make recommendations based on the concrete information that he did have rather than on his speculations about her situation.
Thus, the broker was obliged to protect the investor from her own poor investment decisions. Eye , the S. In the opinion, the Commission stated:. Her request for a plan to increase that income was not a warrant to escalate risks unduly. If the only approach capable of producing the desired income involved significant dangers, Eye should have advised against it.
Even assuming that Ramini client had the objectives and assets cited by Eye, our conclusion would be the same. Here Eye was dealing with a single, unemployed mother who needed income to cover living expenses.
At some point soon after Mr. In its decision to affirm the NYSE-imposed sanctions, the Commission noted,. Having undertaken to act as an investment counselor for the Pattersons, Bruff was required to make only such recommendations as were in their best interests.
Thus, even if the Pattersons wished to engage in aggressive and speculative options trading, Bruff was obliged to counsel them in a manner consistent with their financial situation.
Fiduciary Duties of Trustees: Robert D. Mitchell, Phoenix Attorney
Bruff is yet another decision which stands for the proposition that brokers are bound to protect investors from even their own poor investment decisions. Further, should a brokerage firm and stockbrokers argue that they are not responsible for any losses sustained from certain investments because they were acquired while the clients were with another brokerage firm, this argument must fail.
The clients paid the respondents in return for their services as investment counselors. They were obliged to counsel their clients about all of their investments. Contrary Brokerage Firm Arguments. Brokerage firms typically argue that a stockbroker does not have an ongoing duty to keep clients apprised of information affecting their accounts where no fiduciary relationship exists between broker and client, citing Caravan Mobile Home Sales v.
Generally, they argue that in regard to a non-discretionary account, a broker acts as the agent for the purposes of placing a requested order, but his agency terminates immediately following that transaction. The plaintiff alleged that defendants Lehman Brothers breached their fiduciary duty and sought recovery for these losses after it became clear that a managing director of defendant Lehman Brothers, was also an outside director of Nucorp.
Accordingly, in a situation where the investor client relies upon the stockbroker, who in effect exercises control over the account, Caravan stands for the proposition that a continuing duty does exist. Finally, other Ninth Circuit cases have been much more instructive in analyzing the fiduciary obligations of stockbrokers to monitor customer accounts.
Congress can legislate new legal standards, as it did in Sarbanes-Oxley. Government can engage in regulatory reform and strong enforcement, as the SEC has done with unprecedented vigor over the last year. Regulation can never substitute for people doing their jobs honestly, dedicated to serving their customers as the fiduciaries they are.
So it is for your customers. Too many Americans who piled into the stock at the worst possible time, lured by false expectations of sustained double-digit increases in their personal portfolios, feel fundamentally betrayed by an industry that made them believe unbelievable rises in personal wealth were possible.
Pitt then discussed the concept of improving customer service in the industry when he stated: Service excellence must be your mantra, too. You might be surprised. Only if investors truly believe you care first and foremost about serving their needs and interests will they become customers for life. Like Sewell referred to earlier in speech you need to be committed to giving customers what they most want honesty, integrity and genuine concern for their welfare.
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