Contrary to popular belief, it is well settled that the relationship between a broker and the customer is one of principal and agent by virtue of which a broker is subject to certain fiduciary obligations to the client.
Securities brokers are fiduciaries that owe their customers a duty of utmost good faith, integrity and loyalty. There is a high level of duty for a broker to act in a customer's best interests.
The court in Lieb v. Merrill Lynch, 461 F. Supp. 951, 953 (E.D. Mich. 1978), enumerated a number of duties of a broker maintaining a customer account:
A broker must:
- (1) manage the account in a manner directly comporting with the needs and objectives of the customer as stated in the authorization papers or as apparent from the customer's investment and trading history [citation omitted].
- (2) keep informed regarding the changes in the market which affect the customer's interest and act responsively to protect those interests [citation omitted];
- (3) keep his customer informed as to each completed transaction;
- (4)explain the practical impact and potential risks of the course of dealing in which the broker is engaged.
Brokers also owe the following fiduciary duties to their customers:
- (1) The duty to recommend a stock only after studying it sufficiently to become informed as to its nature, price and financial prognosis.
- (2) The duty to inform the customer of the risks involved in purchasing and selling particular securities.
- (3) the duty not to misrepresent or omit any fact material to the transaction.
It is well-recognized that the churning of a brokerage account constitutes the breach of the fiduciary duty of the broker vested with discretionary authority, to its customers. It also constitutes a breach of fiduciary duty for a broker to invest in unsuitable securities. If you believe that you may have been the victim of the your broker or brokerage firm's Breach of Fiduciary Duty, contact us for a free evaluation of your claim.
Sources / Additional Reading:
Jaksich v. Thomson McKinnon Securities, Inc., 582 F. Supp. 485, 502 (S.D. N.Y. 1984); Schenck v. Bear Stearns & Co., 484 F. Supp. 937, 946 (S.D. N.Y. 1979).
See Davis v. Merrill Lynch. Pierce. Fenner & Smith, 906 F. 2d 1206, 121 14 (8th Cir. 1990); Biggans v. Bache Halsey Stuart Shields, Inc., 638 F. 2d 605, 610 (3d Cir. 1980);
Jaksich, 582 F. Supp. at 502. Davis, 905 F. 2d at 1216 (a fiduciary relationship exists between a securities broker and customer because broker is a licensed professional who holds himself out as a trained and experienced person to render a specialized service);
Mihara, 619 F. 2d at 824 (securities broker has a fiduciary duty to customer where broker knows or should have known that trust has been placed in him).
See Gouger v. Bear , Stearns, 823 F. Supp. 282, 288 (E.D. Pa. 1993) (the broker handling an account has an unequivocal fiduciary duty to the customer with respect to the broker's investment activities and to any facet of their relationship that pertains to the customer's money).
See Carra v Burns, 516 F. 2d 251 (4th Cir. 1975);
Shorrock v. Merrill Lynch, CCH Fed.Sec.L.Rep. 96,251 (D. Or. November 18, 1977).
Miley v. Oppenheimer & Co., Inc., 637 F. 2d 318 (5th Cir. 1981).
Merrill Lynch, 356 Pa. Super. at 183, 514 A.2d at 561.