Due Diligence

Fiduciary Failure Tops Arbitration Claims List

Some b/ds fear that if the SEC extends a fiduciary standard to brokers, their e&o insurance premiums will go up, but insurers say that depends on whether arbitration claims rise, and what kinds of claims they are.

Breach of fiduciary duty was already the biggest single reason cited for FINRA arbitrations cases in 2009 and through May of this year, followed by negligence and misrepresentation, according to dispute resolution statistics. But breach of fiduciary duty is number one every year. The thing is, the fiduciary duty referred to here is not exactly the same thing as the fiduciary standard, explains securities lawyer Bill Singer, a columnist for this magazine. Under tort law, there are certain instances in every business relationship where a fiduciary duty is owed to another--in the case of financial advisors, that may be during the specific finite instance when they are recommending a security to their clients.

"It’s a one-size fits all type of kitchen sink charge. We have certain accounts that in arbitration lawyers always toss in," says Singer. "Lawyers over-plead because they don’t want to be hit by malpractice."

Singer says there will be no impact on arbitration statistics or rewards if the SEC extends the fiduciary standard to brokers. "It won’t change the number of cases filed for breach of fiduciary duty, or the number won based on fiduciary duty. Those which were citing breach of fiduciary duty, will now add breach of the fiduciary standard. Remember Spinal Tap? Their stereo dial went up to 11? Well, arbitration claims laywers will just dial in an 11th claim," he says.

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