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Breach of Fiduciary Duty

A financial service firm owes a fiduciary duty to its customer. The duty arises by way of the relationship between the agent (brokerage firm) and principal (customer).

As a consequence, the fiduciary duty requires a brokerage firm to make full and fair disclosure of all material facts and place the interests of the customer ahead of the interest of the firm or the broker. Courts, including those in California have reiterated that the fiduciary nature of the relationship between a stockbroker and customer "imposes on the former the duty to act in the highest good faith toward the customer."

A fiduciary duty also requires a brokerage firm to comply with industry standards, rules and regulations. The duty also requires brokerage firms to supervise and monitor the activities of the firm's employees, perform pre-sale due diligence and after-sale monitoring of investments. The failure to meet the firm's obligations can be a breach of the firm's fiduciary duty and result in liability.

Wall Street firms may also have statutory fiduciary duties. The most common is codified in The Employee Retirement Income Security Act (ERISA) contains four requirements for 401(k) plan fiduciaries often referred to as the obligation to operate plans for the "exclusive benefit" of the participants. These requirements are:

  1. the duty of loyalty;
  2. the duty of prudence,
  3. the duty to diversify investments; and
  4. the duty to follow plan documents.

ERISA Section 409 states that any "person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach…" The fiduciary may also be held responsible for paying any civil penalties or excise taxes imposed on an employer by a court of law.


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