Notes

Investment advisers across the country are facing increasingly difficult challenges in fulfilling their important regulatory responsibilities. Recently, in January, a United States federal district court found that an investor's right to take her case to arbitration was denied by an Illinois member bank. In a strongly worded decision, the court stated that, by limiting arbitration to non-forfeiture cases, the bank violated both federal and state law. The court also held that the limitation deprived the client of the right to seek damages for violations of fiduciary responsibilities. According to the judge in this case, the regulatory body, the Board of Trustees of the bank, failed to properly explain to its clients the extent of the fiduciary duty they owed to the clients in the transaction leading up to the loss.
In considering the conflict of interest inherent in advisory work, attorneys and law firms often ask whether their clients have a "duty of care" when it comes to advising the Bank of America on matters as wide-ranging as mergers and acquisitions. While the advice of some brokers may be considered "advice" in the ordinary meaning of the word, other advisors may be required to take "cognizance" of specific conflicts among other brokers. As one business lawyer recently explained to an interviewer, in these cases, the fiduciary "cannot take the responsibility" of knowing whether a competitor is pursuing an acquisition at the request of the Bank of America. Moreover, the competing brokerage firms "may not have a reasonable expectation of receiving" such commissions, which the fiduciary has a duty to assess. In these cases, the court does not require the disclosure of a commission fee, as it is not an appropriate relationship for the broker to have with the client.

Another frequently cited conflict of interest between brokerages arises from the fact that some offer "advice" to their clients on merger and acquisition transactions without first having the client evaluate the transaction's potential benefits and drawbacks. In short, these advisors "pass the hat" to their clients and attempt to give them "the inside story." In some cases, the advice given by these brokers could be considered advising another person about buying property, which might not benefit the client.

Some lawyers and accounting firms point out that there are limitations on the ability of brokerage firms to withhold information. Although it is well settled that an attorney-client privilege protects communications between a lawyer and his or her client, it is very difficult to argue that fiduciary duties exist where there is no client-lawyer relationship. In situations such as the Bank of America case mentioned above, there simply was no attorney-client privilege at issue. The Bank of America complaint merely alleged that certain employees of the Bank of America engaged in improper conduct-obtaining advice from clients in the best interest of the Bank of America, rather than the best interests of the Clients. The federal district court denied the motion to dismiss, therefore, forcing Bank of America to acknowledge its responsibility for conflicts within its customer servicing department and pay damages for its actions.

Although conflicts within a brokerage firm may seem somewhat inconsequential to clients, they can have harmful consequences for those who seek advice from these brokers. For example, conflicts within a Bank of America account could result in the loss of principal. If the bank's customer service representatives fail to provide accurate advice regarding the benefits and risks of a particular transaction, the resulting loss could exceed the value of the principal amount transferred to the account. Similarly, dispute consulting to a client could result in the forfeiture of principal. In addition, a disservice to a customer could also result in a default of the loan, which could result in the loss of a home, car, business, etc.

In short, while conflicts of interest may be acceptable among personal doctors, they are not acceptable among investment advisers. A fiduciary is required to take a double standard when dealing with clients. They must ensure that the advice provided is in the best interest of the investor and that the investment adviser receives a compensation based on the expected benefit derived from such advice. Fiduciaries cannot ethically recommend a transaction in which the best interests of the investor may be compromised. This responsibility falls squarely on the shoulders of the investment adviser.
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