Is liability issue brokers’ straw man?

While the securities industry has been sounding alarm bells about the increased liability they would face if a universal fiduciary duty became law, legal observers say it’s not clear that such a standard would really have much bottom-line impact.

They point out that in some states, notably California, courts have long held registered representatives and broker-dealers to a fiduciary standard in dealing with their customers. Yet few legal claims against brokers end up in court, say the experts, because most brokerage firms mandate arbitration, a forum that critics charge is friendlier to the industry and where arbitrators rarely explain their decisions — even when they rule in favor of investors.

In mandatory arbitration, panelists don’t apportion awards according to specific claims, attorneys say, so it is hard to quantify the impact of a fiduciary standard for brokers. Further, “there’s still some probability that [a universal fiduciary standard] will not be followed” by arbitrators who may not respond to a strong legal argument, said Scot Bernstein, a Folsom, Calif.-based plaintiff’s attorney.

Arbitration awards also typically aren’t as generous as jury awards, so even if arbitrators are applying a fiduciary standard, industry liability isn’t as great as if the cases were adjudicated in court.

Even in California, defendants will argue that they are under no fiduciary duty, said Jeffrey Lendrum, founder of the Lendrum Law Firm PC in San Diego. “I’ve yet to see [an arbitration panel] define whether there is” such a duty or not, he said.

In addition, nearly all states have adopted the last update to the Uniform Prudent Investor Act, which governs fiduciary conduct with trust accounts, including custodial ac-counts, individual retirement ac-counts, and any charity, non-profit, foundation or endowment account, said Chris McConnell, a lecturer and expert witness on fiduciary duty.

The broad application of fiduciary duty is why plaintiff’s attorneys almost always allege a breach of fiduciary care when they go after a broker or firm.

A NATIONAL STANDARD

Whether or not it will be a cure-all, some plaintiff’s attorneys think that a national fiduciary standard, depending on how it is defined, might bolster their claims of broker misconduct, even in arbitration.

“In almost all states, if the conduct is really egregious, courts will say you breached [a fiduciary duty],” said Tamar Frankel, a professor at Boston University School of Law and a scholar on fiduciary duty.

A federal fiduciary standard “could have significant impact on other states” beyond California, said Scott Shewan, a member of Born Pape & Shewan LLP in Clovis, Calif., and president of the Public Investors Arbitration Bar Association.

“Breach of fiduciary duty is in almost all of my claims,” he said.

“I don’t think [arbitrators] blow it off. They understand that brokers are fiduciaries in [California and that] unsuitability is a breach of fiduciary duty,” Mr. Shewan said.

“Firms and brokers have a very good argument at present in that the fiduciary relationship is limited to where there is a discretionary account” or certain other factors exist, said Alan Foxman, a Boca Raton, Fla.-based attorney who handles customer cases and defends individual brokers as well.

If Congress created a clear fiduciary relationship without restrictions, “I think that would give claimant’s attorneys a much stronger argument,” he said.

The financial-reform package passed by the House, which Mr. Foxman thinks would help plaintiffs, directs the Securities and Exchange Commission to set standards of conduct for brokers and broker-dealers that are the same as those imposed on investment advisers under the Investment Advisers Act of 1940.

The Senate bill, passed last week, doesn’t contain a fiduciary provision, though it could be added later.

A federal standard might also trigger more obligations to disclose fees and conflicts of interest, attorneys say, and if such disclosures aren’t made, brokerage firms could be liable.

In addition, a broader fiduciary duty could help class-action plaintiffs who take on Wall Street firms.

“Once it becomes federal law, [a fiduciary standard] becomes an entrée into federal court from a jurisdictional standpoint,” Mr. Lendrum said about class-action claims. And under a national standard, more fiduciary case law would develop in courts, which could then be applied in arbitrations, he said.

Another provision in the financial-reform bill could help investors and present problems for brokers beyond the fiduciary standard. Both the House and Senate versions would give the SEC explicit power to prohibit or limit forced arbitration agreements.

E-mail Dan Jamieson at [email protected].

Related Topics: Securities and Exchange Commission