The Blame Game

Q: In a grueling arbitration hearing this year, the complainant's attorney alleged I'd acted in a fiduciary capacity by purchasing and allocating a variable annuity for my clients. I claimed I had no fiduciary responsibility, but had merely recommended and sold an appropriate product for this client's needs. When is a broker or a financial planner a fiduciary? A: The answer to this question depends

Q:

In a grueling arbitration hearing this year, the complainant's attorney alleged I'd acted in a fiduciary capacity by purchasing and allocating a variable annuity for my clients. I claimed I had no fiduciary responsibility, but had merely recommended and sold an appropriate product for this client's needs. When is a broker or a financial planner a fiduciary?

A:

The answer to this question depends on where you are and the nature of your relationship with your customers.

A fiduciary relationship is a relationship of special trust and confidence that gives rise to a heightened duty of care and disclosure. In some states, a broker may “automatically,” by virtue of his occupation, owe a fiduciary duty of care to every client. In most states, though, a broker will commonly owe a fiduciary duty only to those clients for whom he exercises discretionary authority over their accounts.

Whether or not he exercises discretionary authority, he may owe a fiduciary duty to clients for whom he has done something to form a unique bond of trust beyond a purely commercial or contractual relationship.

The “something” might be a fact that could lead a neutral observer to conclude the relationship is not “arm's length.” Examples include cases in which the broker is related to or dating a client, has formed a special friendship with a client over an extended time or knows of (and is in a position to take advantage of) a client's physical or mental infirmities.
Byron C. Keeling
Holman Keeling & York
Houston, Texas
713-223-2220
[email protected]

A:

Under the laws of most states, brokers and financial planners are considered to be fiduciaries, held to an exacting standard of care and responsibility to their clients. In his treatise, Broker Dealer Law and Regulation, Professor Norman Poser defines the standard of care as:

“…it is normally not sufficient for a broker to exercise ordinary care and judgment in discharging his duties. He must employ such care, skill, prudence, diligence and judgment as might reasonably be expected of persons skilled in this calling. If his customer's money is lost because the broker undertakes his duties without possessing the requisite skills, or because of his negligence, the broker is liable for the loss.”

California, for instance, imposes a fiduciary duty on planners and brokers and requires them to act “with utmost good faith toward the customer.” They have a duty to make full and complete disclosure and provide the client with all relevant information regarding any investments. They're also required to “know all of the essential facts concerning the client's financial situation and needs and to faithfully consider these in recommending investments.”

The standard of care is objective. It's dictated by the customs and practices in the industry. Failure to adhere to industry rules and regulations or to follow your firm's compliance manual are considered breach of fiduciary duty.
Erwin J. Shustak
Shustak Jalil & Heller
San Diego
619-696-9500
[email protected]

Q:

Last year a former client of mine from a firm where I'd previously worked filed a complaint with the NASD regarding handling of his accounts. He named me, my previous branch manager and the former firm. Now the complaint's evolved into a full-blown lawsuit alleging several million dollars in investment losses. My former client is an outright liar, whose falsified paperwork sent by me to him concerning these accounts.

My questions are these:

Should I seek separate legal counsel or allow my former firm's attorney to represent me? They've agreed to represent me for no cost, as long as my interest doesn't run contrary to the firm's. (It doesn't.)

Can I sue my client? His baseless allegations have caused sleepless nights and subjected me to excessive scrutiny and heightened level of supervision by my current employer because the complaint and pending arbitration are on my Form U4.

A:

Absent a conflict of interest, it is quite common for firms to extend an offer of representation to their current or former representatives. Such joint representation is both cost-efficient and increases the likelihood that a unified case will be presented to the arbitration panel. From your perspective, paying for your own counsel to litigate the case through conclusion of the arbitration could be extremely costly. It is unlikely that your former firm is under any obligation to pay for separate counsel for you. As long as you are comfortable with the attorney retained by the firm and believe that he or she is protecting your interests, you should not hesitate to enter into the joint representation. I routinely represent representatives in cases where I also represent the firm.

It is unlikely that a basis exists for you to sue your former client. Generally speaking, allegations raised in litigated matters are immune from defamation actions. Regrettably, neither the NASD nor NYSE Codes of Arbitration Procedure provide any sanctions for the filing of frivolous claims. Although I was successful in one case in securing an award from an arbitration panel that dismissed all claims and directed the customer to reimburse the firm for costs incurred in litigating the matter, it is extremely rare for a panel to penalize a customer. You best bet is to work diligently to defeat the customer's claim and move forward.
Steven M. Malina
Ungaretti & Harris
Chicago
312-977-4405
[email protected]

Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.
The Ethical Rep.
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New York, N.Y. 10011-5300
[email protected]
Fax: (913) 514-3890.

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