Professionalism on the Margins; an examination of securities broker’s liability
If you lost money in the stock market and it was being handled by a stock or securities broker, it may well be worth getting a second opinion. Your money may have been lost through the negligence of that very stock broker either through their action, or inaction, in handling your money. The liability of the broker, and their employer by vicarious liability, might be up to the entire amount of your loss.
The Professional Standard:
In lawsuits involving securities/stock brokers, especially when people are looking to sue stock brokers the standard to which they are held is very important. The reasonable standard to which professionals are held has been a constantly debated point within the law of negligence. It is clear that persons with a certain level of expertise or professionalism in a trade should have a higher standard; however, this standard clearly cannot be that someone in a profession must be the perfect professional.
Generally in Canadian law members of a profession are held to a standard of the reasonable member of their profession, they are required to have the skill of a reasonably competent professional in their field.1 A doctor is held to the standard of a reasonable doctor, a surgeon to that of a reasonable surgeon and a lawyer of a reasonable lawyer. This extends past the self-governing professions as well including such organizations as police officers.2 The standard is someone who is specially training of technical knowledge.3 It is also important to note that beginners at a profession do not receive a lower standard.4
Stock Brokers as Professionals:
Stock brokers fall within the definition of professionals. Stock brokers are regulated, licensed, and receive specialized training. A stock broker must act as a reasonable member of the profession with the skill of a reasonably competent stock broker. If they are found incompetent they may be found liable for professional negligence. In short, they must act as a reasonable stock broker when trading on the stock exchange with their clients’ portfolio. The standard which has been imposed on a stock broker has been partially set out by such bodies as the Association of Chartered Institute of Stockbrokers, the Investment Dealers Association and the Canadian Securities Institute.5 These are the rules that stock brokers must follow.
Standard of Care of Stock Brokers:
In cases which consist of a claim about carelessness or inappropriate advice about investments, the standard has been found to be if the stock broker advised their customers carefully, fully, honestly, and in good faith.6 In cases about inappropriate actions by stock brokers or actions taken without authorization most stock broker cases become about whether the contract allowed for the trade in question to be done.7
When there is a conflict of interest this constitutes a breach of the duty to act in good faith.8 A conflict of interest includes in this instance such practices as ‘churning’ accounts by making many trades in order to increase costs at a financial cost to the investor. By stock broker churning of an account it can greatly decrease your portfolio. For this reason it is often important to ensure that stock brokers do not have perverse incentives in their work where they can gain personal benefit at a loss to their clients. Otherwise clients can lose their money, including often RRSP (Registered Retirement Savings Plan) funds. This also includes when a stock broker implies that he or she has information that they do not, such as inside information or close connections with those on the board of the company.9 Lying stock brokers or securities brokers, even in this way, cause major issues to investors.
Additionally, stock broker relationships with their clients are fiduciary relationships which raise duties beyond that of simple standard of care.10 Stock Brokers are not allowed to be in a position where they are personally benefiting from the trades made by their clients.11 The situation should not be that a stock broker benefits off of you in a personal way.
Stock brokers have an imposed duty to inform their clients in good faith and to exercise the skill of a reasonable member of their profession. This includes but is not limited to standards such as those set out by the Association of Chartered Institute of Stockbrokers, the Investment Dealers Association and the Canadian Securities Institute.12 It is breaches of these rules and those set out by case-law which may potentially find a stock broker negligent even where they have followed the instructions of a client.
1. Challand v. Bell,  A.J. No. 49
2. Hill v. Hamilton-Wentworth Regional Police Services Board,  3 S.C.R. 129
3. Challand v. Bell,  A.J. No. 49
4. Challand v. Bell,  A.J. No. 49, p.198
5. Northey-Taylor v. Casey,  A.J. No. 256
6. Kovalik v. Laidley,  Q.J. No. 2436
7. Shoaga v. TD Waterhouse,  O.J. No. 330
8. Glennie v. McD. & C. Holdings Limited, (1935) S.C.R. 257 at p. 277
9. Elderkin v. Merrill Lynch, Royal Securities Ltd. (1977) 80 D.L.R. (3d) 313
10. Elderkin v. Merrill Lynch, Royal Securities Ltd. (1977) 80 D.L.R. (3d) 313
11. Osborne v. Harper,  B.C.J. No. 1849
12. Northey-Taylor v. Casey,  A.J. No. 256