Breach of Fiduciary Duty – Is your Broker acting in your Best Interest?

A breach of fiduciary duty occurs when someone who owes a legal or ethical duty to act in the best interest of another person fails to fulfill that duty. In other words, it’s a violation of the trust that one person places in another. 

Fiduciary relationships can take many forms, such as between an attorney and client, a trustee and beneficiary, a corporate officer and shareholders, or a financial advisor and client. In each of these relationships, the fiduciary is expected to act in good faith, with loyalty, and in the best interest of the other party. 

When a breach of fiduciary duty occurs, the fiduciary has typically acted in a way that benefits themselves, or another party, to the detriment of the party to whom they owe the duty. This breach can take many forms, such as failing to disclose conflicts of interest, misappropriating funds, engaging in self-dealing, or violating a duty of confidentiality. 

The consequences of a breach of fiduciary duty can be severe, including civil liability, criminal charges, and professional sanctions. The party who was harmed by the breach may be entitled to damages or other remedies to make them whole. 

What duties are owed to you by your Broker or Investment Advisor? 

Brokers and investment advisors owe their clients a number of duties, which are collectively known as fiduciary duties: 

Duty of Loyalty: They must act in the best interest of their clients and put their clients’ interests before their own.
Duty of Care: They must exercise reasonable care and skill in making investment recommendations and providing investment advice.
Duty to Follow Instructions: They must follow their clients’ lawful instructions.
Duty to Disclose Material Information: They must disclose all material information related to the investments they recommend or advise on, including any conflicts of interest.
Duty to Manage Risk: They must manage risk appropriately and not expose their clients to undue risk.
Duty to Avoid Unauthorized Transactions: They must not make any unauthorized trades in a client’s account.
Duty to Maintain Confidentiality: They must maintain confidentiality with respect to their clients’ personal and financial information. 

These duties are based on the principle that the broker or investment advisor is in a position of trust with respect to their clients. If your broker or investment advisor breaches any of these duties, they may be subject to disciplinary action by regulatory authorities, and the client may have the right to pursue legal action to recover damages. 

FINRA and the SEC Regulations – Breach of Fiduciary Duty 

FINRA (Financial Industry Regulatory Authority) and the SEC (Securities and Exchange Commission) are regulatory bodies that oversee the securities industry in the United States. Both organizations have rules and regulations regarding breach of fiduciary duty by individuals or firms in the securities industry. 

FINRA Rule 2111 (Suitability) requires broker-dealers to make recommendations that are consistent with the customer’s best interest. Broker-dealers must have a reasonable basis to believe that the recommendation is suitable based on the customer’s investment profile. FINRA Rule 2150 (Improper Use of Customers’ Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) prohibits broker-dealers from misusing customer assets or sharing in customer accounts. 

SEC Rule 10b-5 (Employment of Manipulative and Deceptive Practices) prohibits the use of any manipulative or deceptive device in connection with the purchase or sale of any security. This includes making material misrepresentations or omissions of material facts to clients. SEC Rule 206(4)-1 (Advisory Contracts) requires investment advisers to disclose any conflicts of interest and obtain written consent from clients before engaging in certain transactions. 

Regulation Best Interest Rule (Reg BI)

Regulation Best Interest (Reg BI) is a set of rules established by the U.S. Securities and Exchange Commission (SEC) in 2019. The purpose of Reg BI is to raise the standard of conduct for broker-dealers and investment advisors who provide investment advice to retail customers. The rule sets forth several obligations that broker-dealers must meet when making investment recommendations to customers. 

Under Reg BI, broker-dealers must act in the best interest of their customers when making recommendations about securities transactions, investment strategies, or account types. Specifically, broker-dealers must: 

• Disclose Material Facts: Broker-dealers must provide customers with clear and concise information about the products and services they offer, including any potential conflicts of interest that may arise from the recommendation. 
• Exercise Reasonable Diligence: Broker-dealers must exercise reasonable diligence, care, and skill when making recommendations to customers. This includes conducting a reasonable basis suitability analysis and having a reasonable belief that a recommendation is in the best interest of the customer. 
• Mitigate Conflicts of Interest: Broker-dealers must establish policies and procedures to identify and mitigate conflicts of interest that may arise from the recommendation. This includes disclosing conflicts of interest and implementing safeguards to ensure that recommendations are not influenced by conflicts of interest.
  Maintain Written Compliance Procedures: Broker-dealers must establish, maintain, and enforce written compliance procedures to ensure that they comply with the requirements of Reg BI. 

Reg BI is intended to provide greater clarity and transparency to retail customers regarding the investment advice they receive from broker-dealers. The rule is designed to promote investor protection and enhance the integrity of the securities market by requiring broker-dealers to act in the best interest of their customers when making recommendations. 

Both FINRA and the SEC have enforcement powers to investigate and discipline individuals or firms who violate their rules and regulations regarding breach of fiduciary duty. This can include fines, suspensions or revocations of licenses, and even criminal charges. 

Breach of Fiduciary Duty Examples

The following are a few examples of recent disciplinary actions taken against brokers for breach of fiduciary duty. 

Unauthorized Trading: If your broker makes trades in your account without your permission, that could be considered breach of fiduciary duty. Learn more: 

FINRA reportedly suspended a Laidlaw broker this week after he allegedly exercising discretion in accounts that were not supposed to be discretionary accounts. 

Conflicts of Interest: When your broker recommends an investment that benefits them more than it benefits you, this can be a conflict of interest and a breach of fiduciary duty.  

On March 2, 2022, the SEC charged Cambridge Investment Research Advisors with breaching its fiduciary duty by failing to disclose material conflicts of interest related to its selection of mutual funds and wrap accounts for clients. Cambridge Investment Research allegedly invested client assets in certain mutual funds and money market sweep funds that generated millions of dollars in revenue sharing payments to an affiliated broker-dealer, Cambridge Investment Research, Inc., instead of lower-cost share classes and investment options that would have yielded less or no revenue sharing.   

Unsuitable Recommendations: If your broker recommends investments that are not suitable for your financial goals, risk tolerance, or other personal circumstances, this can be a breach of fiduciary duty. 

Former Western International Securities broker Mike Patatian allegedly made unsuitable recommendations to his customers for REIT purchases, variable annuity surrenders, and variable annuity exchanges. Further, he reportedly overstated his customers’ financial information and investment experience, to obtain approval of the REIT purchases.  FINRA has reportedly barred Patatian from associating with any FINRA member in any capacity for these violations.  Patatian was reportedly required to disgorge the commissions from his allegedly unsuitable recommendations, pay restitution to customers who sold their REITs at a loss, and offer rescission to the customers who have not sold their REITs, according to public records on FINRA’s website. 

Negligence or Mismanagement: If a broker fails to exercise reasonable care and skill in managing your investments, this can be a breach of fiduciary duty. 

Failure to Disclose Material Information: If a broker fails to disclose material information related to an investment they recommend, including any conflicts of interest, this can be a breach of fiduciary duty. 

Over the past year, FINRA has sanctioned numerous firms for failing to disclose material information about GPB Capital offerings. Specifically, FSC Securities, Royal Alliance, SagePoint Financial and Woodbury Financial allegedly negligently failed to communicate to investors that in an offering that GPB Capital Holdings, LLC failed to timely make required filings with the Securities and Exchange Commission, including filing audited financial statements. The firms were reportedly required to pay fines and restitution to investors.   

Churning: If a broker excessively trades in your account to generate commissions, this can be a breach of fiduciary duty. 

FINRA reportedly barred ex-IFG broker Francis Velten after he allegedly churned and flipped his elderly customers’ accounts at his member firm. Velten purportedly encouraged them to surrender their annuities and sell mutual fund holdings away from the firm and use the proceeds to purchase bonus annuities. 

Misrepresentation or Fraud: If a broker makes misrepresentations about an investment or engages in fraudulent activity, this is a breach of fiduciary duty and may also be a violation of securities laws. This may include borrowing money from a client.  

The Securities and Exchange Commission reportedly barred financial advisor Dustin Shafer from working in the securities industry after charges by the State of Illinois alleged broker misconduct including allegations that he borrowed money from an elderly client.    

These are just a few examples of breaches of fiduciary duty. If you believe your broker has breached their fiduciary duty to you, it is important to speak with a FINRA attorney or other qualified legal professional to assess your options. 

Hiring a FINRA Attorney 

If your broker breaches their fiduciary duty and you suffer investment losses, you may have recourse through FINRA Arbitration.  An experienced FINRA attorney, such as those at the White Law Group, can help you in several ways. 

A FINRA attorney can evaluate your claim and determine if you have a valid case against your broker. They can review your account records, investment recommendations, and other relevant documents to assess the strength of your case. 

If you file a complaint with FINRA, a FINRA attorney can represent you in the proceedings. They can help you navigate the complex rules and procedures of the FINRA dispute resolution process, present your case effectively, and negotiate a settlement on your behalf. 

The securities attorneys at the White Law Group can help you pursue legal action to recover damages. They can file a lawsuit on your behalf, represent you in court, and negotiate a settlement with the broker or their employer. 

The White Law Group can help you protect your rights as an investor and hold your broker accountable for any breach of fiduciary duty. They can guide you through the legal process, advocate for your interests, and help you recover any losses you may have suffered. 

If you have an investment related dispute, the securities attorneys at the White Law Group may be able to help you. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases.  The firm has offices in Seattle, Washington and Chicago, Illinois and reviews securities cases across the country.    

 If you or someone you know is concerned about a breach of fiduciary duty with your broker, the securities attorneys of The White Law Group may be able to help. To speak with a securities attorney, please call offices at (888)637-5510.   

   

 

 

 

 

Tags: churning, Dustin Shafer, fiduciary duty, FINRA arbitration, finra attorneys, finra rule 3010, FINRA Rule 3110, Francis Velten, GPB Capital, Mike Patatian, misrepresentation, Reg bi, securities attorneys, unsuitable investments Last modified: October 27, 2023