Breach of Fiduciary Duty

In order to support a claim for a breach of fiduciary duty, the following elements must be proved: (1) a fiduciary duty existed between a customer and her broker, (2) the broker breached that duty and (3) damages occurred because of the breach. The statistics maintained by FINRA for filed arbitrations show that breach of fiduciary duty is the most frequently cited controversy in customer arbitrations.

Whether a broker owes his client a fiduciary duty depends on the details of the work being done and the nature of the relationship between the broker and the client. For example, investment advisers are considered fiduciaries for their clients under the Investment Advisers Act of 1940. Conversely, a retail broker with a non-discretionary account taking orders from clients, without more, is not considered a fiduciary by many courts (this does not deter claimants from frequently alleging breach of fiduciary duty in arbitration claims, as evidenced by the FINRA statistics cited above). However, if a retail broker exerts actual or de facto control over a client’s account, an arbitration panel could determine that a fiduciary relationship existed. Moreover, if that client is particularly young or elderly and financially unsophisticated, or if the client and broker had a close personal relationship, resulting in the client’s unquestioned reliance on the broker, a fiduciary relationship could be found.

Generally, a fiduciary owes his client duties of loyalty, care, good faith, and fair dealing. A fiduciary should act in the best interests of his customer and operate without conflicts of interest. Further, a fiduciary should adhere to a standard of care whereby the fiduciary handles his customer’s investments in a reasonable and prudent manner. Reasonableness and prudence, in this sense, imply that the fiduciary should adhere to industry norms and practices and act in the same fashion that a reasonably prudent professional in like circumstances would conduct himself.

The specific obligations a fiduciary owes his customer, in the context of the securities industry, are derived from FINRA’s best practices and rules incumbent on registered representatives. For example, FINRA requires its members to observe ethical practices, such as requiring them to know “the essential facts about their customers," and prohibits them from recommending unsuitable securities to a customer. As an example, FINRA Rule 2010 provides: "A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." If a fiduciary relationship does exist, a fiduciary in the securities industry owes his client the specific duty to carefully monitor her account and advise the customer of foreseeable risks.

The fiduciary duties owed in this context often mirror that of the obligations articulated under the suitability rule. Under the suitability rule, the registered representative is expected to suggest securities or investment strategies that are carefully selected and are in the best interests of the client. Similarly, the fiduciary duties of loyalty and care overlap the obligations articulated in the suitability rule. Therefore, many claims for breach of fiduciary duty also allege violations of unsuitable trading.

When a registered representative breaches a fiduciary duty owed to a customer, the fiduciary is liable for damages that are proximately caused by that breach. Those damages can include out of pocket losses, lost opportunity costs, interest and attorneys’ fees. In rare cases, the aggrieved party may also be awarded punitive damages to punish the breaching party and deter similar conduct in the future.

Allegations of breach of fiduciary duty, while commonly raised in customer arbitration claims, are more difficult to prove than, for instance, allegations of negligence, unauthorized trading, etc. An experienced and knowledgeable securities arbitration attorney can review your account activity, and examine the nature of your relationship with your broker, to determine if a legitimate claim of breach of fiduciary duty exists.