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Breach of Fiduciary Duty

The term “fiduciary” is meant to include those persons who have legal responsibility for managing someone else’s money. Common fiduciaries are trustees of private trusts, investment advisors, and investment committees of retirement plans. A fiduciary must always act in the best interest of the person for whom he has fiduciary responsibility. This means that he must not act in any way that is contrary to the interest of the client he is serving.

One’s fiduciary status is determined by a multitude of facts and circumstances. Generally, though, this status is defined as a person who manages property and/or financial funds for the benefit of another, who exercises discretionary authority or control over assets and/or acts in a professional capacity of trust regarding investment advice.

While they are not commonly known as fiduciaries, brokers can, in certain situations, be considered fiduciaries. A broker who has discretionary authority has the client’s authorization to make investments on his own without first consulting the client. If the broker has this discretionary authority over an investor’s account, the broker may owe the investor a fiduciary duty. This fiduciary duty requires the broker to use extra care in making investment decisions and in managing the account properly.

If a broker does not take great care in protecting the investor’s assets, then he may have committed a breach of fiduciary duty. According to the Rules of Fair Practice set down by the NASD, a broker has breached his duty if he :

  • recommends speculative securities without complete knowledge of the customer’s financial situation, including whether or not the customer can bear the risk;
  • does excessive trading (churning) in a customer’s account (regardless of whether or not the account is discretionary);
  • sets up fictitious accounts to transact business that would normally be prohibited;
  • engages in short term trading (and switching) of mutual funds;
  • makes any transactions without the client’s knowledge or engages in unauthorized use of funds;
  • recommends purchases that are not consistent with the client’s ability to pay;
  • commits fraudulent acts (such as forgery and the omission or misstatement of material facts);

If an investor feels that he has suffered losses due to negligence on the part of his broker, the investor should contact a corporate lawyer who is well versed in breaches of fiduciary duty.