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Professional law: a stock broker's obligations, including the "know your client rule"

In a judgment rendered in October 2011, the Court of Appeal concluded that a contextual analysis was a good method to use in order to measure the intensity of a broker’s obligations towards his clients. According to the Court, the request, by an investor, to be presented with different ways to recover an unrealized loss shows the investor’s impetuous temperament when the market fails to reach his expectations. The broker’s obligations towards such a client must be evaluated in consequence (Immeubles Jacques Robitaille inc. v. Financière Banque Nationale, 2011 QCCA 1952).

THE FACTS

The appellant Robitaille began his business relationship with Mr. Coulombe, representative of the the Financière Banque Nationale in 1991. In 1996, Coulombe buys for the appellant four millions American bonds that come to term in 30 years. In the days following their acquisition, the value of the bonds suffer a significant decrease and Robitaille meets Coulombe in order to develop a strategy that can be used to recover any loss. Together, they decide to proceed on purchasing call options on the S&P index. According to Robitaille, Coulombe presented the call option as being without risk. Coulombe instead invokes that he thoroughly explained the functioning of the option agreements on the market to his client, including the possibility of suffering a loss, and that he provided Robitaille with a number of information pamphlets further detailing option agreements.

After everything was said and done, the appellant found himself with a three million dollar loss.

Before the Superior Court, Robitaille argued that Coulombe had failed to respect his obligations of competence, diligence and loyalty by neglecting to give his client all the adequate information regarding option agreements and by advising him to invest in a way that was incompatible with his investing objectives.

The judge decided that Robitaille understood the mechanism of options, a mechanism that responded to his taste for fast gains, and that even though the client file prepared by Coulombe should have better reflected the elevated risk of the investments in question, Robitaille consented to participating in all the stock deals. Consequently, Coulombe satisfied his obligations of prudence and diligence. This decision is brought to appeal by Robitaille.

THE COURT OF APPEAL’S JUDGMENT

After having considered the arguments invoked by the appellant, the Court of Appeal draws the following conclusions:

  1. Seeking important gains in a short term period on the stock market necessarily implies the acceptance of a risk that is proportional to the expected return (more substantial risks).
     
  2. The obligation of means to which a broker is held obliges him to always act with prudence, diligence, honesty, loyalty and in the best interest of his client.
     
  3. This means that the broker should always know his clients’ profiles and their investment preferences, in accordance with the know your client rule.
     
  4. When a number of documents are provided to the client at the time that his account is opened, the client must familiarize himself with the content of these documents and must make a minimum effort in understanding the functioning of his investments.
     
  5. The broker or representative who respects his professional obligations does not need to fear whether or not he should follow through on a mandate, even if, in his opinion, the mandate may be too risky for his client.
     
  6. The law simply requires that the broker act with diligence when carrying out his duty to inform and advise his client, the protection of the investor’s interests do not extend to obliging the broker to suspend his client’s right to opt for certain investments indefinitely.
     
  7. However, the act of modifying a client’s profile without the client’s knowledge in an attempt to adjust his file to certain fraudulent transactions performed by the broker, is undoubtedly an act that is contrary to the know your client rule.
     
  8. The Court of Appeal thus confirms the judgment rendered by the Superior Court.

THE LESSONS TO BE LEARNED

  1. The purchase, by an investor, of bonds in order to recover a theoretical loss may lead one to believe that said investor has developed an interest in speculation in the short term and a certain tolerance to risk.
     
  2. In order to respect his obligations of prudence, diligence, honesty and loyalty, the broker must ensure that his client’s investments correspond to his investment objectives and to his particular financial situation.
     
  3. We must hold all investors to a standard of elementary prudence; they are expected to take note of all the information that is given to them by their brokers in order to better guide them in their investment decisions Dubé Légal inc., Montréal professional liability lawyers.