When promises are made and consideration paid (or if the person promised reasonably relies on the promise and takes action) a contract is formed. Contracts can be written, oral or even implied by the actions of the parties. While oral and implied contracts are more difficult to prove, legal action can be taken when such contracts are breached.
If an investor opens an account with a financial firm and is led to believe his or her account will be handled in a certain manner, a contract therefore exists between the financial firm and the client. When the account is not handled as promised and losses occur, the investor can consider legal action.
When most investment accounts are opened a new account agreement is almost always signed. This agreement usually exists in addition to promises made to the clients. Most claims against brokers and other investment advisors involve breach of both written agreements and oral promises.
Regulation of the securities industry is delegated by the Securities Exchange Commission (SEC) to self-regulatory organizations (SROs), primarily the National Association of Securities Dealers, Inc. (NASD). The NASD and other SROs have rules and regulations designed to protect investors. Brokers and their firms must enter into contracts with NASD and other SROs to become registered representatives and member firms. Investors are the intended third-party beneficiaries of these contracts with the regulators.
Additionally, under the “shingle theory” cases have determined that when a brokerage firm “hangs its shingle” it has a duty to investors to follow the rules and regulations of the securities industry.
Breach of Fiduciary Duty
A “fiduciary” is defined in law as one who has the legal duty to act in the best interest of another. A “fiduciary duty” is an affirmative duty of good faith that compels the fiduciary to place the client’s interest before his or her own interest. Laws in different jurisdictions determine who is considered a fiduciary and the duties of fiduciaries.
When broker agrees to execute an order, the broker and firm have a fiduciary duty of “best execution” – to not place the firm’s interest before the clients and to execute the order at the best price available in the marketplace.
When brokers agree to manage clients assets and/or obtain permission to place orders on their behalf, the brokers have additional fiduciary duties to these clients. Financial Advisors have an even greater fiduciary duty to their clients, and brokers and their firms are often considered fiduciaries to their clients when performing the same function.
Recently, a Federal appeals court determined that when brokerage firms handle client accounts in fee-based “wrap accounts” they are subject to the Federal Investment Advisors Act of 1940. This Act places a fiduciary duty on investment advisors. Prior to that decision, the SEC had granted an exemption from this act for stock brokers and their firms.
A claim for “breach of fiduciary duty” is considered in the nature of a fraud under laws of most jurisdictions and this claim is afforded certain legal benefits over other claims such as negligence.
We offer a free consultation to those who locate us via our Website!