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Customer Agreements - Traditional Advisory Accounts The relationship between an FSL and their clients at general law The terms of the contract between a FSL and its client
* The scope of an FSL's duties to its clients depends on the terms of the contract between the licensee and client (Hawkins v Clayton). o If it is a written contract terms may be implied under general contractual principles (Con-stan v Norwich) if:
? It is so obvious that it goes without saying
? It is necessary to give business efficacy to the contract
? It is reasonable and equitable
? It is capable of clear expression; and
? It does not contradict the express terms
? [For example] A simple instruction to a stockbroker by a client to execute a transaction is unlikely to satisfy requirement 2 for a term that the stockbroker is to offer investment advice.
* Thus in Eric v Preston there was no evidence a stockbroker agreed to act also as an investment advisor because this shouldn't be implied to give the contract business efficacy - especially where the broker's FSL didn't authorise him to do so o If there is no written contract, terms may be more readily implied (Byrne v AU Airlines)
* [Duties and obligations] An FSL may be s.t. duties and obligations arising from the nature of a particular role o [Stockbrokers/futures brokers] are under an obligation to
? Carry out their clients instructions as long as it is lawful to do so.
* If they act in accordance with the clients instruction and their legal obligations they may be indemnified for liabilities arising out of the transaction
* If they do not they may lose their commission and their right to their indemnity, and be liable in damages for breach of contract
? Undertake a transaction at the best possible price for the client within the limits set by the client's instructions.
* It must also purchase/sell securities at a lower/higher price than the price specified by its client (Thomson v Meade)
* The obligation to undertake a transaction lapses at the point which the market price of the securities exceeds the buying price or is lower than the selling price specified by the client
The broker has no general authority to initiate transactions such as sale/purchase of securities without the client's instruction (Option Investments v Martin)
? To make a valid and enforceable contract, act honestly and observe the rules, usages and market practices of the exchange; keep its client's property separate from its own; keep proper accounts .
? [They are not under]
* A positive duty to advise its clients to close out its position if the broker considers they will suffer loss and no duty to do that themselves (Drexel v El Nasr)
* An obligation to close out a client's position immediately after the client fails to meet a margin call or repudiates its contract (Options Investments v Martin)
* [But cf] A futures broker is under an obligation to act in good faith in the manner of closing out a client's position though it will be able to discharge this by closing it out on an on-market dealing
? In Bernadle v How Trading the VSC held that a clearing participant who was s.t. an implied obligation of good faith in exercise its rights to liquidate a trader's portfolio breached it by failing to act reasonably in doing so o [Insurance brokers | NZ Cases] are under an obligation to ensure that effective cover is arranged by the insurer (Cee Bee v Lombard). They must either arrange insurance within a reasonable time or advise if unable to do so (Cee Bee). They must take reasonable care in ensuring the cover they arrange is appropriate and in accordance with the insured's instructions (Tadoran v Delaney) Agency
* An FSL may act as its clients agent in aspects of its business - o Stockbrokers being instructed to buy/sell shares o/b/o a client acts as its agent (Christopher Barker v IRC)
? [The scope of this agency] is modified by the fact that brokers operate in a competitive market where commodity prices are set by a large number of individual trades and their reduced ability to influence prices by negotiations. They act as an "intermediary rather than a negotiating agent" (Jones v Cameron) o An insurance broker acts as agent either for the insurer or insured
? They usually act on behalf of the insured in arranging insurance or setting a claim (Con-stan v Norwich)
* [Binders exception] An exemption exists where the broker is acting under a binder (being an agreement with an insurer by which the broker is given authority
to make certain decisions that would otherwise be made by the insurer - e.g. authority to grant final cover).
* Brokers who act under a binder act as agents for the insurer instead of the insured
[Ratification of unauthorised transactions] At general law a client isn't bound by, and is unable to ratify, unauthorised transactions undertaken by a broker if the broker didn't disclose the client as its principal at the time of the transaction (Maynegrain v Compafina Bank) o The origin of this principle seems to be the same as the idea in Trident v McNiece that a contract cannot be made on behalf of an undisclosed principal unless the agent has the principal's authority to make the contract o [Exception?]In Maynegrain v Compafine Bank it was held that a client is entitled to ratify the contract in circumstances where the other party knew that the broker was acting as an agent, although it didn't know the identity of the particular client
? This can get complicated where the broker enters a single transaction o/b/o several clients - here it is difficult to identify which of the broker's clients is its principal in the transaction, until the broker allocates parcels to satisfy a particular client's order
Fiduciary duties of FSLs
* The seminal case in this area is Daly v Sydney Stock exchange o Facts: The appellant's husband had placed money with a broking firm as a loan, after an employee of the firm advised him not to invest immediately in the stock market o Held (court below): The relationship of the appellant and broking firm was that of debtor/creditor and no constructive trust arose irt the money deposited with the firm. Since the firm's failure to repay the loan wasn't a defalcation, the appellant couldn't recover her loss from the fidelity fund. o Held (Gibbs): Normally the relationship between a stockbroker and client will be of a fiduciary nature such as to place on the broker an obligation to make to the client a full and accurate disclosure of the broker's interest in the transaction o Held (Brennan J):
? His honour looked more to the incidents of the particular broker/client dealings and said that if a broker holds itself out as having expertise in advising as to investments, and undertakes to give advice, they stand in a fiduciary relationship to the person they advise.
? A broker is under a particularly demanding duty if they propose to offer a client an investment in which they have a financial interest and they are then required:
* To furnish the client with all the relevant knowledge possessed by the broker, concealing nothing that might
reasonably be regarded as relevant to the making of an investment decision
* Reveal the identity of the buyer/seller of the investment when that identity was relevant
* Give the best advice they could give if they didn't have that financial interest
* Reveal fully the financial interest; and
* Obtain for the client the best terms which the client would obtain from a TP if the adviser were to exercise due diligence on behalf of his client in such a transaction This apparently conflicts with the HC's decision in Breen v Williams that fiduciary obligations are proscriptive rather than prescriptive and do not impose positive duties on the fiduciary to act in the interests of the person to whom the duty was owed
* In Aequitas v Sparad these two decisions were attempted to be reconciled by treating the positive duties as arising due to implied terms of the contractual relationship instead of being fiduciary in character
Fiduciary obligations arising outside traditional categories
* The relationship between FSL and client may be fiduciary even where the licensee doesn't act as agent for its client. This will occur where...:
The financial services licensee undertakes/agrees to act for or o/b/o or in the interests of, its client in the exercise of a power or discretion which will affect the interests of the client in a legal/practical sense, so that the FSL has a special opportunity to exercise that power or discretion to the detriment of its client, who is therefore vulnerable to abuse by the FSL of its position (Hospital Products) o Thus it will arise between a financial adviser and client where the adviser holds itself out as an expert on financial matters and undertakes to act in the client's interest and not solely in its own interestsDaly v Sydney Stock Exchange for a stockbrokerCBA v Smith for a trading bankAequitas v Sparad for a corporate adviserBut cf. Berndale Securities v How Trading - a clearing participant was not s.t. fiduciary obligations irt the liquidation of a trader's portfolio because the power given to a clearing participant in the case of contractual default was intended to protect its own (not the client's) interest
One should not readily infer the existence of a fiduciary relationship since that relationship arises in a business context in which customers may be expected to understand that the FSL is seeking to promote the sale of their FPs or FSs and to expect honesty rather than a lack of self-interest in context
Content of fiduciary obligations
Where the relationship between a FSL and its client is fiduciary in character, then that licensee is obliged to avoid situations where there is a real and serious conflict between its interests and the interests of the client within the scope of the engagement, or between duties owed to different clients (Chan v Zacharia) o Armstrong v Jackson: irrespective of whether a stockbroker sells at market price or acts without fraudulent intent, it won't be permitted "to place itself in a situation which under ordinary circumstances would tempt a man to do that which is not best for his principal" o Hewson v SSE - a broker was criticised for placing himself in a position of competing with its client irt certain orders in carrying on a business as a share trader. Similar criticisms were made in Bonds
& Securities v Glomex Mines against a broking firm who acted as a broker for a purchaser of securities in circumstances where an employee of the firm had an interest in the company that was the seller of the securities. The court emphasised the high standards of integrity required in stock broking
Restriction of scope of fiduciary duty
[Limits of the engagement] The scope of a financial service's licensee fiduciary duty to its client may be restricted to coincide with any limits to the scope of the licensee's engagement by its client (Hospital Products) o Thus where a fiduciary relationship arises out of the terms of a contract between the FSL and client, the terms of the contract determine the scope of the fiduciary relationship. The nature of the obligations accepted under the contract must be taken into account to do so. o The extent of a stock/futures broker's duty may depend onWhether the client depends on that broker for information about investment strategies and the performance of the market
Whether the client typically acts on the broker's recommendations
The scope of the duty would be wider if a client regularly sought investment advice from the broker and typically acted on their recommendationsThe number of dealings between the broker and particular clientThe scope of the broker's retainer (which could be limited to just executing traders in according to instructions or may extend to offering advice)
o Eric Preston v EurozHeld: Any fiduciary relationship between a stockbroker and its client must accommodate itself to the terms of the contract between the parties and, since it was not a term of the retainer in that case that the stockbroker would act as the client's financial advisor, there could be no fiduciary obligation requiring to do so
Consider for e.g. the position of a sophisticated investor - it is likely that the scope of any fiduciary duty to give advice would be narrowed
Held: Even if the client had established that it was a term of the retainer that the broker would act as its financial advisor, any fiduciary obligation owed by the broker wouldn't give rise to positive duties of investigation/advice since fiduciary duties are proscriptive
[Market custom] The scope of obligations may also be modified by market custom o SCF Finance v Masri - in the context of futures markets it was held that the practice by which a futures broker traded for its own account at the same time as trading for its client as agent was well known and accepted and didn't involve breach of the rule against COI o Jones v Canavan - the principle that an agent may not generally act for both parties in a transaction without their informed consent is modified by the usages of the stock exchange, which allow a broker to cross a buy and sell order at a particular price
Contractual exclusion of fiduciary duty and ratification
Contracts between FSL may exclude fiduciary relationships - this is likely to require full and frank disclosure to achieve the client's informed consent to the exclusion of the duty where there is a pre-existing fiduciary relationship o A FSL may also avoid breaching avoid breaching its fiduciary duty by obtaining its client's ratification of the breach after full disclosure of the breach, either in anticipation or after the event
This was considered in ASIC v Citigroup o Facts: The internal structure of Citi was divided into an IBD which provided IB services to wholesale investors on the private side and equities trading on the public side. ASIC alleged they breached their fiduciary duty to Toll, a takeover bidder, by allowing their proprietary trading desk to continue trading in shares in Patrick after they were mandated as Toll's adviser to Patrick o Held: The mandate letter between Citigroup and Toll which provided that Citi was engaged as an "independent contract and not in any other capacity including as a fiduciary" was sufficient to exclude a fiduciary duty in the circumstances. Citigroup wasn't under an obligation to obtain Toll's informed consent to that exclusion in the absence of any allegation of a pre-existing fiduciary duty. o Held: Implied consent may have been implied from Toll's knowledge of Citi's structure
Remedies for breach of fiduciary duty
Remedies include: o A declaration that a contract is voidable at the client's instance o Prevention of the FSL recovering a commission o An account of profits on the fiduciary in relation to any profit made in breach (Chan v Zacharia) o Equitable compensation for its loss (CBA v Smith) extending to the amount of any loss which the client wouldn't have suffered in the absence of the FSL's breach of its fiduciary duty, not strictly limited by requirements of foreseeability and remoteness (Re Dawson)Contributory negligence is not available in an action for equitable compensation (Pilmer v Duke)
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