Friday, December 26, 2014

Special Needs Trusts

Tune in tomorrow at 11:30 a.m. to 101.5 WORD-FM to hear Michele Conti discuss the ABC’s and 123’s of Special Needs Trusts.

Tuesday, December 16, 2014

What Duty of Loyalty is Owed to the Client?

What Duty of Loyalty is Owed to the Client? 

Since 2011, the SEC has advocated for a uniform fiduciary standard in order to clear up the confusion in the minds of many investors regarding the scope of the duties owed to them by their advisors.

Brian J. Sommer
Currently, the law in many jurisdictions makes a distinction between the extent of the duty of loyalty owed by investment advisors and financial advisors employed by broker dealers. Generally speaking, investment advisors owe their clients an ongoing duty of loyalty whereas financial advisors do not. The problem is that most investors believe that they are owed an ongoing duty of loyalty regardless of whether they are dealing with an investment advisor or financial advisor. Consequently, the SEC is advocating for clearer guidance regarding the duty of loyalty and its ongoing nature.

But until such time as Congress accepts the SEC’s recommendations, it is best practice for advisors to clearly spell out in their client agreements the scope of their obligations to their clients so as to avoid confusion and in order to make clear the boundaries of the services offered.

Such guidance is welcome because Pennsylvania law on the matter is actually unclear and perhaps even contradictory.  For starters, under Pennsylvania law, the advisor is the agent of the client and as such the relationship is a fiduciary one. Consequently, the advisor is subject to a duty of loyalty to act only for the client’s benefit.  See Basile v. HR Block, 761 A2d 1115, 1120 (Pa. 2000). Unless otherwise agreed, this duty of loyalty subjects the advisor not to act or agree to act during the period of their agency for other parties whose interests conflict with those of their client in matters in which the advisor is employed. See Restatement (Second) of Agency, §394. Consequently, given the ongoing nature of advisor-client relationships, the duty of loyalty arguably remains even after the transaction or transactions are completed.

Interestingly, the duty of loyalty is defined to include, but is not limited to, the duty to disclose to the client all relevant information. Basile, 761 A2d at 1120. This, however, is where the ongoing nature of the duty owed becomes muddled. Within the specific context of the securities industry, courts have stated that this duty to provide clients information includes but may not be limited to information which is relevant to the affairs entrusted to the advisor, which the advisor has notice of, which the client would desire to have, and which can be communicated without violating a superior duty to a third person. Merrill Lynch v. Perrelle, 514 A2d 552, 561 (Pa. Super. 1986). Thus, Perrelle suggests that these duties are limited to each transaction and end thereafter which arguably contradicts the more general standard under which, as discussed above, the duty of loyalty is ongoing throughout the client-advisor relationship.

This tension illustrates the need for a uniform fiduciary standard as proposed by the SEC. Indeed, currently, without a clear showing of the parties’ intent, much is left open for interpretation by a tribunal as to the ongoing nature of the duty of loyalty owed to a client. Thus, and until such time as Congress adopts the SEC’s proposed uniform fiduciary standard, it is prudent for client agreements to be reviewed in order to determine whether or not there are any limits on the duty of loyalty.

Brian Sommer is an attorney at Pittsburgh-based law firm Meyer, Unkovic & Scott. His practice is focused on commercial litigation, particularly securities litigation, intellectual property disputes, Marcellus Shale litigation, and shareholder rights. Brian can be reached at or 412.456.2887.

This material is for informational purposes only. It is not and should not be solely relied on as legal advice in dealing with any specific situation.

Friday, December 5, 2014

Radio Show - Succession Planning

Tune in tomorrow at 11:30 a.m. to 101.5 WORD-FM to hear Michele Conti discuss the importance of regular succession planning for small, family owned businesses since the market and family situations change.