The Evolving Scope of a Stockbroker’s Duties in the Wake of Holmes v. Grubman

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Introduction

Investment professionals sometimes owe heightened duties to their clients. The scope of those duties is determined by the nature of the relationship between the stockbroker or adviser and his or her client. At one extreme, where the broker has a power of attorney and makes investment decisions on behalf of the client, a fiduciary relationship usually follows. At the other extreme, where a client places orders independent of a broker, such as in an online brokerage account, courts generally find an arms’-length relationship. Federal and state courts have struggled to define the nature and scope of duties that apply to the varied investment relationships that lie between these two extremes. This article evaluates the nature of the duty based on the relationship between the client and the adviser or broker, and the various sources for interpreting the scope of a heightened duty, if any, that may apply to this relationship. The article then considers a recent holding by the Supreme Court of Georgia in Holmes v. Grubman and its impact on the scope of a stockbroker’s duties under Georgia law.

I. The Traditional Framework for a Stockbroker’s Duties

If a heightened or even a fiduciary duty is found to exist, an investment professional may be held to a higher level of conduct than is typically found in commercial transactions. Black’s Law Dictionary defines a “fiduciary duty” as:

A duty of utmost good faith, trust, confidence, and candor owed by a fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer’s client or a shareholder); a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as the duty that one partner owes to another).1

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Published In: Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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