The novel coronavirus and the disease it causes, Covid-19, are having an unprecedented impact on businesses and individuals, and law firms are doubling down to provide counsel and maintain the operation of their firms. In this series we’re asking key questions of attorneys about how this global pandemic is affecting the work they do.
Tamar Frankel is a professor at Boston University School of Law, focused on fiduciary law, corporate governance, mutual funds and financial regulation.
Lawdragon: How are brokers’ duties affected or changed by the current Covid-19 crisis?
Tamar Frankel: The status of the brokers’ duties has been fought for a number of years in the courts, in the Labor Department, the SEC and in particular states, such as New Jersey. The question is whether broker-dealers sales talk is advice subject to fiduciary duties: duty of care and duty of loyalty, avoidance of conflicts of interests or disclosing conflicts to the investors. The Securities and Exchange Commission passed recently a rule that outlined their duties, but did not impose completely and unequivocally fiduciary duties on broker dealers when they advise their clients on what to buy or sell.
LD: How is this market volatility affecting brokers?
TF: Market volatility is a source of greater income for brokers-dealers. They are getting paid whether their clients lose or gain and are not getting paid when the clients are willing to take the long-term view and do not trade. Therefore brokers’ interests are conflicting with those of their clients. The current market volatility is the best thing brokers may hope for. Their contribution to the markets-volatility by advising clients who are worried about the unusual environment is a source of income (one way or another) to brokers.
The combined health and financial problems (if not disasters), the investors’ concerns of losing their savings, and their tendency to listen to the brokers’ advice, may increase the securities’ markets’ volatility and pose serious conflicts of interest by the brokers’ unregulated advice.
LD: Should brokers consider the Covid-19 crisis a force majeure event?
TF: Not necessarily. The facts are not the issue. Their advice is the issue. They should ask themselves: “What should I do in this situation?” And offer this advice to their clients.
If the brokers own securities the proof is in how they traded in their own securities. If they give different advice to different clients they might have to account for the differences and their connection to pay or other reasons.
There are ways to show conflicts of interest, mistakes, or the right advice. Fiduciary law is rich with similar situations.
However, force majeure may also lead brokers to avoid giving advice. That would protect them from liability. That is, provided they gave no advice or the same advice to clients (taking their personal circumstances into consideration) and to themselves. Even then, if they continuously advise buy and sell, and sell and buy, they might be liable if these suggestions do not relate to the current situation.
Visit our Covid-19 Resource page for a round-up of legal resources regarding the novel coronavirus.