July 2011 Archives

July 14, 2011

Stockbroker Breach of Fiduciary Duty is the Number One Investor Complaint

Once again, breach of fiduciary duty ranks as the most frequently alleged customer claim according to our mid-year review of securities arbitration cased filed with the Financial Industry Regulatory Authority ("FINRA"). Other commonly alleged claims include negligence and misrepresentation.

So far this year, customers have prevailed and been awarded damages in 48% of the cases that went to hearing. This is the highest win ratio reported by FINRA over last five years. The lowest ratio of winning cases occurred in 2007 when only 37% of arbitration cases received any sort of damage award at all. For more information about arbitration awards, see our analysis of San Francisco arbitration awards for the year 2009.

What is a Stockbroker's Fiduciary Responsibility?

The dictionary definition of the word fiduciary simply states: "involving confidence or trust." A fiduciary relationship can arise whenever someone places their trust and confidence in another. Investment advisors have always been considered fiduciaries under federal law. Stockbrokers, on the other hand, are generally not subject to a fiduciary duty under the federal securities laws; however, courts have found that stockbrokers have a fiduciary duty under certain circumstances. Although the laws of each state differ on this issue, stockbrokers are considered fiduciaries in California and many other states. The leading California case on a stockbroker's fiduciary duty is Twomey v. Mitchum, Jones & Templeton, Inc., 262 Cal. App. 2d 690, 69 Cal. Rptr. 222 (1968), which held that the stockbroker-customer relationship is fiduciary in nature and "imposes on the broker, the duty of acting in the highest good faith." Furthermore, if the stockbroker has discretionary control over the customer's account, the courts will impose a more heightened fiduciary duty.

A breach of fiduciary duty can arise whenever a broker places his or her own interests ahead of their customer's. Claims for breach of fiduciary duty usually overlap with other causes of action such as negligence, misrepresentation, unsuitability, overconcentration, and churning.

Adopting a Uniform Fiduciary Duty Standard for Brokers and Advisors

The different fiduciary standards that apply to stockbrokers and investment advisors has been under attack lately. According to a study by the Securities and Exchange Comission ("SEC"), many investors do not understand the distinction between a stockbroker and an investment advisor. Under a mandate from the Dodd-Frank Act, the SEC recommended the adoption of a uniform fiduciary duty applicable to both stockbrokers and registered investment advisors ("RIAs"). The uniform standard proposed by the SEC, states:

The standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.

Although the SEC stated that it would formally propose a new standard by July 2011, adoption has been delayed leaving many to doubt whether a "uniform" fiduciary duty for all financial professionals will become a reality any time soon.