Breach of Fiduciary Duty
One of the most common claims in securities arbitration is that an investment adviser breached a fiduciary duty owed to their client. A fiduciary duty requires the investment adviser, and in certain circumstances a broker, to act in the best interest of the person they owe the duty to, namely the investor or customer. This duty encompasses the duty of care, the duty of loyalty, and the duty of good faith and fair dealing. In securities arbitration, breach of fiduciary duty claims commonly arise when the investment adviser acted negligently or recklessly in providing investment advice, or when the investment adviser and/or broker made misrepresentations or omissions by failing to disclose material information regarding the investment transaction that would have affected the customer’s investment decision.
An investment adviser is a fiduciary to their investors and clients. The Investment Adviser Act of 1940 memorializes the rules that advisers must comply with to ensure that they are upholding the fiduciary duty they owe to their clients. This means that the investment adviser has an obligation to act in the best interest of their customers and provide investment advice that conforms to the investor’s investment objectives and risk tolerance. Investment advisers owe each of their investment customers a duty of care, duty of loyalty and a duty of good faith and fair dealing. Generally, these duties require investment advisers to ensure that they take all of the necessary and required steps to fulfill their obligations to their clients. Specifically, these obligations prevent investment advisers from engaging in activity that conflicts with the interests of clients and misleading clients by failing to provide full and fair disclosures of all material facts that clients would consider to be important when making investment decisions. Further, investment advisers must disclose all conflicts of interest that could potentially cause the adviser to render advice that is not neutral and disinterested.
Brokers should understand that courts have recognized that a fiduciary duty can arise in certain circumstances between a broker and customer, including, but not limited to, when the broker assumes control over the account, when the broker and investor have been long-time friends and the customer is relying on the relationship of social trust between the customer and broker, and if the broker exercises a high degree of control over the account of a very old or young customer who has very little general investment experience or knowledge.
To ensure that investment advisers are upholding their fiduciary duty, investment firms are required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Investment Adviser Act of 1940. The Securities and Exchange Commission (SEC) requires that these compliance policies and procedures are designed to prevent, detect and correct violations of the Investment Adviser Act of 1940. The policies and procedures should address portfolio management processes, accuracy of disclosures, safeguarding client assets, accurate creation and retention of required records, safeguarding of investor records and information, trading practices, marketing services, and business continuity plans. When an investment adviser breaches these duties and obligations, it could lead to losses and damages for investment customers.
Our team at Lax & Neville LLP has successfully reviewed, investigated, settled, presented and defended a variety of litigation and arbitration claims for breach of fiduciary duty on behalf of their clients in FINRA and AAA arbitrations, as well as various state and federal courts. If you have any questions regarding a potential breach of fiduciary duties, contact our team at Lax & Neville LLP today and schedule a consultation.